Parallel Worlds and Brexit: Guiseppe Ballocchi, CFA

The “Future State of the Investment Profession” study describes four scenarios that detail how the future of investment management could unfold. The “Parallel Worlds” scenario anticipates the rise of populism, a reduction in the size of the middle class, and a decrease in social mobility.

For a better understanding of how this scenario could affect the future of the investment management industry, we spoke with Giuseppe Ballocchi, CFA. In the interview, Ballocchi examines what populism is and explores globalization, the role of government in investment management, and how the industry can benefit society. He has a unique perspective on these issues, particularly on Brexit and its effect on the markets.

A member of the Future of Finance Content Council, Ballocchi is a money manager specializing in derivative strategies. He is a partner at Alpha Governance Partners, a provider of high-end fiduciary governance services, and teaches at the University of Lausanne in Switzerland. He previously served as head of financial engineering and risk analytics at one of the largest private banks in Switzerland; as the CIO at Olsen Ltd., a fixed-income manager at the Asian Development Bank in Manila, the Philippines; on the board of CFA Institute; and as president of CFA Society Switzerland. Trained as a physicist, Ballocchi also worked at CERN.

CFA Institute: To what degree do you think populism played a part in the Brexit vote result? Are there connections that can be made to the Parallel Worlds scenario?

Guiseppe Ballocchi, CFA: First, we should be very careful in the use of the word “populism.” It can have a negative connotation, akin to demagoguery, which the Greek philosopher Plato identified as the key risk to democracy, leading to its corruption. However, it also means, according to the Oxford English Dictionary, “The policies . . . which seek to represent the interest of ordinary people.”

The path to globalization, while raising people out of poverty, and reducing inequality among nations, is arguably increasing the wealth gap in developed countries and making it more difficult for the middle class to sustain itself. The key challenge is to ensure that globalization, technological innovation, and finance are for the ultimate benefit of society as a whole, and that citizens see it that way. The “Future State of the Investment Profession” promotes a move to creating a true finance profession, one that is trusted, value-focused, ethical, and sustainable. One that can benefit society through a clean license to operate. In the investment world, this implies that the investment profession must put investors first, as CFA Institute relentlessly advocates and reminds professionals through its annual Putting Investors First campaign.

The Brexit referendum is an interesting case study, as many of the mechanisms at play there can also be found in other countries, even outside of the European Union. Indeed Brexit voters comprise parallel worlds, ranging from the “haves” — largely successful professionals with a global footprint, whose careers and wealth have been boosted by the forces of globalization — to the “have-nots,” who experience, or fear, a reduction in their living standards and ability to find jobs. In the past, parallel worlds existed, but with limited interaction. Technology and global supply chains have coupled parallel worlds rather tightly, exacerbating the clash between the fast pace of technology and the much longer time that human behavior and culture require to adapt to change.

I still remember attending one of the first presentations on the World Wide Web, when it was created at CERN. At the end, possible applications were discussed. However, the revolution in information technology exceeded all wildest dreams, to such an extent that governments, organizations, and individuals alike struggle to cope with it. For many of the “haves,” this represents an unprecedented opportunity, while for a number of have-nots, it is a serious threat. At the same time, as our Parallel Worlds scenario states: “These technologies allow huge numbers of the disenfranchised to peer into the lives of others. . . . It also creates resentment as issues of fairness arise.”

The Parallel Worlds scenario contemplates a transfer of responsibilities from some government agencies to institutions. What are some of those responsibilities and how will the related services be provided?

In the current world, governments tend to struggle with the plurality of needs, and they are under pressure to reduce their budgets after decades of unrelenting increases. Moreover, while technology and finance tend to move fast and on a global scale, political structures and the legal framework take much longer to adapt and are shaped by local concern. Uncertain geopolitics and rising populism make international collaboration more challenging.

In this context, it is therefore likely, and in my opinion desirable, that organizations, whether profit-driven or not, play an extended role.

Generally speaking, organizations have a much narrower mission and a nimbler governance structure than governments, as they do not need the same level of checks and balances and public accountability that governments require. This enables organizations to adapt, innovate, and in many cases raise resources faster than governments can. In a recent CFA Institute survey of over 135,000 investment professionals, 82% were in favor of increased private ownership of business and industry as opposed to increased government ownership. Six percent of survey respondents disagreed and 12% were neutral.

All of those factors are key advantages in a fast-moving, technology-driven world. Organizations can also operate on the basis of globally shared values and can achieve a strong global culture unlike governments, which remain bound to their national base of constituents.

There are examples in the finance world. Whereas regulation has been rising, regulatory fragmentation has occurred because of the challenges of international cooperation in the government sector.

In order to effect change, there must be belief in the system, and organizations need to build and maintain trust with stakeholders and the public. According to the Edelman Trust Barometer, the governments of 75% of the countries tracked are distrusted. An organization of members sharing the same values worldwide, such as CFA Institute, has the ability to lead the investment profession globally with its Code of Ethics and Standards of Professional Conduct, which of course, is a complement but not a replacement for local, government-sponsored regulation. The practice of any profession requires trust, as the professional has information and competencies that the client obviously does not have. Trust cannot be built with regulation alone, in a context of information asymmetry, but requires a Code of Ethics whereby the reputation of professionals who abide by it is reinforced, while transgressors lose their credibility.

Your Enterprising Investor post on Brexit and currency risk details the risks that come with increased globalization and cross-border trade. What should investors do to protect themselves from unexpected risks due to globalization and the challenges detailed in the Parallel Worlds scenario?

The Parallel Worlds scenario requires fresh, out-of-the box thinking to deal with investment risk. This is because the scenario is quite different from the geopolitical conditions that have prevailed in the last few decades with nation states increasingly espousing the merits of globalization and increased international cooperation, with the United States being the global leader. Under this scenario, we are much more likely to face geopolitical uncertainty and sudden volatility, as well as the risk of politically motivated financial repression. As highlighted by Carmen Reinhart and Kenneth Rogoff, the latter arises when debt-burdened governments attempt to whittle down their debt at the expense of savers.

This is why it is essential to be good students of history and its lessons over the centuries and not just rely on quantitative models. Legal and country risk are going to be important considerations to ensure asset safety and access to liquidity. Diversification is going to be part of the answer, but most likely, across extended dimensions.

Investors should be mindful that populist sentiment under the Parallel World scenario can create new risks arising from skepticism or outright hostility to investor activities. To manage these risks, it is essential that asset owners as well as their investment managers engage with society and articulate how what they do is beneficial to society as a whole.

Whether through real or financial assets, investors are progressively acquiring a global footprint. Why is the concept of a single reference currency that underpins traditional wealth management no longer sufficient? What should investors in this situation do?

I would add that the global footprint is acquired also through human capital, global liabilities, and financial objectives. In examining how people with a global footprint should manage currency risk, I find it necessary to revisit the function of money as a store of value, a unit of account, and a medium of payment, and to take a fresh look at the concept of risk in light of geopolitical changes.

This approach leads me to abandon the notion of a single reference currency in favor of a customized basket of currencies representing liabilities and financial objectives. If financial objectives cannot be modeled in currency terms, which is the case for a number of wealthy people with a global footprint, I would recommend diversifying currency risk by adopting a global currency basket, including some gold.

Cryptocurrencies offer food for thought. First, in the not-so-far future, fiat currencies may adopt the more advanced blockchain technology embedded in cryptocurrencies. However, what is more interesting to investors is that cryptocurrencies, unlike fiat currencies, are not linked to national governments. If the success of cryptocurrencies is due, at least in part, to diminished trust in national monetary authorities in charge of fiat currencies, this would have far-reaching consequences for investors and the financial system at large.

Does the future present a borderless world where people, ideas, and capital move freely? Or are we facing a big step back in the value of globalization? Is affiliation more likely to be horizontal to your network or vertical to your nation? If so, where are we on that path?

My hunch is that although there will be obstacles, globalization is not going to be stopped, but it will be modulated in line with local cultures. Therefore, it will not be any longer just the spread of Western concepts. In finance, I expect more and more contributions from other countries. People will have multiple affiliations based on shared values and transcending national boundaries. For instance, I am quite impressed by the sense of community from being a CFA charterholder, or being in the same profession. Having trained as a high-energy physicist, I learned that not even the Iron Curtain between the Soviet Union and Western countries could stop scientific collaboration and the sense of common purpose among researchers.

However, in the Parallel Worlds scenario, people with a global mindset live alongside others with very limited knowledge outside of their local environments. This causes serious challenges. I believe that if we fast-forward to the future, the strongest affiliations are more likely to come from willing choice, rather than by the accident of birth.


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