“There is no consumption. And when there is no consumption, production drops, which leads to higher unemployment”. So said IESE professor and CIIF President Juan José Toribio at the Center's 17th Annual Symposium, held March 9th in Madrid. His colleague Javier Díaz-Jiménez also painted a picture of very slow growth and consumption, greatly exacerbated by the lack of credit from banks and savings institutions for private initiative, as was highlighted by Professor Antonio Argandoña.
In fact, according to Professor Alfredo Pastor, “if the banking sector itself had not been so involved in the crisis, the situation would be quite different.”
As well as discussing the current economic situation, speakers at this edition of the CIIF Symposium presented the main results of research carried out by the center over the last year.
Maximizing the growth of capital invested
Professor Javier Estrada proposed the maximization of the geometric mean as a new criterion for optimizing investments portfolios. “When optimizing their investments portfolios, both academics and business leaders tend to use average and variance as parameters. They set a goal of maximizing risk-adjusted returns using metrics based on the Sharpe ratio to establish optimum exposure for the assets under consideration,” said the professor.
But Estrada presents an alternative criterion: maximization of the geometric mean in order to achieve maximized invested capital growth and thus maximization of terminal wealth. “The criterion takes various attractive properties into account and is easy to implement,” explained Estrada, “but even so it is not often used in the context of maximization of risk-adjusted returns."
Taking advantage of housing price predictability
Real estate assets have a particular feature compared to other assets in the economy. According to Professor Carles Vergara, “we are going through periods of very low or zero price growth. Housing booms occur very sporadically and when they do, prices shoot up."
According to the professor, the decision to change home is determined by the ratio of total wealth to real estate wealth. “Families move to a larger or smaller home when their ratio of wealth reaches a high or low threshold. Before moving to a larger property, families save by investing in low-risk bonds. On the other hand, when they have to move to a smaller one, they borrow money before moving,” explains Vergara.
The professor concludes that families borrow loans for larger amounts of money during real estate booms, and that interest rates are a significant factor in the level of savings and loans of those families that have moved.
Low profitability of pension funds and plans
Professor Pablo Fernández highlighted some of the data on investment funds and pension plans from his latest research on Ranking of Pension Fund Managers in Spain. 1994-2009.
“Most investment funds - almost 1,000 of them - have produced less than 3% profit; over the last decade, only three funds had a return greater than 10%,” Fernández pointed out.
It's the same story with pension plans of more than 10 years. “Their profitability is very low,” asserted the professor. Indeed, most of these assets had less than a 2% profitability.
As for commissions, Spain ranks “second.” Spanish investment fund mangers charged an average of 2.7 percent commission in 2009, a rate exceeded only by Canada's 3 percent.
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