Change comes in many forms and for many reasons. In finance, lately, it has come about all too often as a result of scandals that ignited investor outrage, leading, finally, to government-mandated reforms. Thus a rash of accounting irregularities spawned the Sarbanes-Oxley legislation meant to crack down on corporate fraud; market-timing and late-trading revelations triggered new mutual fund industry regulations; and the exposure of tainted securities research led to the $1.4 billion settlement between leading investment banks and their regulators.
The landmark settlement, reached nearly two years ago, is changing the face of Wall Street research, as can be seen in this month’s cover story, which presents the 2004 All-America Research Team. A host of new rules designed to eliminate conflicts of interest have caused ructions in research departments, with slashed budgets and thinned ranks of seasoned analysts, who have been disappointed over pay cuts and increased bureaucracy or lured by the siren song of hedge funds. These changes have exasperated many of the thousands of institutional investors who vote in our survey. But there is good news as well for Wall Street, as Senior Editor Justin Schack’s accompanying article notes: In the midst of all this turmoil, investors believe that the quality of research is improving, that it is less fraught with conflicts and is more objective and accurate. In other words, the regulatory crackdown is working.
Change doesn’t always come about at the sharp edge of a subpoena. The most potent force in a free market is the power of an idea. The tenets of modern portfolio theory, elaborated and extended over the course of several decades beginning in the 1950s, transformed investing right down to its square roots. In 1974, Institutional Investor made its own contribution to the dialogue about investing, launching the Journal of Portfolio Management under Founding Editor Peter L. Bernstein. Since then the work of seven winners of the Nobel Prize has graced its sparkling pages. In this month’s issue of II, beginning on page 110, we’re delighted to present two articles from JPM’s just-released 30th anniversary issue -- “The Backward Art of Investing Money,” by Nobelist Paul Samuelson (page 112), and “Blinded by Theory?” by Robert Arnott (page 116) -- and to bask in reflected laureates.
