|Date:||08 March 2019|
|Author:||dr. Auke Plantinga|
In the past two decade we have experienced a rather dramatic change in the way that households invest. Fuelled by a lot of bad press on active management and the skills of banks and asset managers, many have decided to disengage from stocks market investing and switch to a standard savings account, mutual funds and index funds. Obviously, the global financial crisis of 2007/2008 had a lot to do with this too.
Unfortunately, this leads to a disconnect between the typical citizen and the financial markets. While allowing for tremendous benefits for society, a lot of people lost their trust in financial markets. One of the reasons for this is the strong focus on individual returns in combination with the anonymity of investments. It is of course difficult to deny that the main motive for investing is financial returns. However, money itself doesn't create wellbeing, but the way it is spend may have a big impact. As an example, most of us would appreciate a carefully selected birthday gift over a check. This also applies to investing. Probably the only benefit of investing in the MSCI Global Large Cap Equity Index is its financial returns and perhaps the idea that you have not been ripped off by a greedy asset manager.
For this reason, it is understandable that investors increasingly choose for socially responsible investments. Yet, many socially responsible investment funds are spread across the globe, and give the investor little more than the idea of doing well without knowing what it actually means. Globalization provided the world with economic growth, but made it difficult for the individual human being to understand and belief in the system that generates wealth. It has become abstract and far away, resulting in rising populism and focusing on the home country. Donald Trump got elected on his theme 'Make America great again', yellow vests crowd the streets of France, the people of Great Britain opted for Brexit, and so on.
It is important that humans can effectively engage and connect with the systems that support their lives, and one of these systems is the financial system. For this reason I have a very modest proposal that may be helpful. I propose that people can choose an investment portfolio of firms that is active in the local neighbourhood, province, or city. In particular, I propose that such a portfolio would allocate its investments according to the number of people working in the region for the particular firm. Essentially, you invest in firms that employ your neighbour.
There are some practicalities here, but I did some basic checks for the province of Groningen, which yielded interesting results. First of all, there are more than 100 companies active in Groningen that are listed on the stock market. That is sufficient for creating a well diversified portfolio. There are many firms listed on a foreign exchange, and so perhaps the most surprising results is that you end up with an internationally diversified portfolio. In addition to a portfolio of firms only listed on a stock market, the portfolio might be extended with venture capital to directly encourage local economic growth.
Of course, my proposal is rather broad and should be investigated further to make it operational. Yes, there are a lot subjective choices. What kind of firms do we want in Groningen? Polluting firms with a lot of employment? Should we focus on the energy transition? But having these discussion on the level of a local investment fund is a lot better than outsourcing them to fund managers in faraway financial centres!