Fiduciary finance and the pricing of financial claims: a conceptual approach to investment

Australians have over $1 trillion invested in fiduciary products such as pension funds (ABS, 2006a). Since the early 1980’s, the policies of successive governments have compelled most of the working population to seek its fortune in financial markets. Over the same period investment has emerged, in its own right, as an important business discipline. Scholars have largely avoided critical examination of the discipline’s scientific status, choosing instead to concentrate their efforts on refining tests of market efficiency. However, corporate debacles and episodic volatility in financial markets have fostered incredulity amongst stakeholders as to how the market actually operates. The overarching purpose of this thesis, therefore, is to evaluate the science of investment and to espouse a conceptual approach to investment which brings the scholarship and applied practices into closer alignment. Particular emphasis is placed on the funds management operations in the market. Existing scholarship has analysed pricing outcomes assuming that economic norms are reflected in investing practices and financial markets overall. Critiques of the discipline’s flagship theoretical models, however, find that they are disguised tautologies which have not imparted new knowledge, and as such, are pseudo-scientific. Little progress, it is argued, appears to have been made in the discipline since the formative precepts of investment were promulgated in the 1930s and 1950s. Despite the investment industry’s economic stature, its microeconomic setting, product structures, and interactions with financial markets, have not been integrated into academic research. Ultimately, the vast majority of investors, being secondary investors, are captives of the industry’s “gatekeepers”. Winning the “investment game” is not, as investors might suppose, a strategy of maximising investment returns: in fact it is a risk-averse strategy of tracking average market performance overseen by the industry’s gatekeepers. It is only the relative minority of primary, non-institutional, investors who need superior information of the industry’s endogenous forces and constraints to outperform the market averages.