1st Edition

Moving Beyond Modern Portfolio Theory Investing That Matters

By Jon Lukomnik, James P. Hawley Copyright 2021
    144 Pages 4 B/W Illustrations
    by Routledge

    144 Pages 4 B/W Illustrations
    by Routledge

    Moving Beyond Modern Portfolio Theory: Investing That Matters tells the story of how Modern Portfolio Theory (MPT) revolutionized the investing world and the real economy, but is now showing its age. MPT has no mechanism to understand its impacts on the environmental, social and financial systems, nor any tools for investors to mitigate the havoc that systemic risks can wreck on their portfolios. It’s time for MPT to evolve.

    The authors propose a new imperative to improve finance’s ability to fulfil its twin main purposes: providing adequate returns to individuals and directing capital to where it is needed in the economy. They show how some of the largest investors in the world focus not on picking stocks, but on mitigating systemic risks, such as climate change and a lack of gender diversity, so as to improve the risk/return of the market as a whole, despite current theory saying that should be impossible. "Moving beyond MPT" recognizes the complex relations between investing and the systems on which capital markets rely, "Investing that matters" embraces MPT’s focus on diversification and risk adjusted return, but understands them in the context of the real economy and the total return needs of investors.

    Whether an investor, an MBA student, a Finance Professor or a sustainability professional, Moving Beyond Modern Portfolio Theory: Investing That Matters is thought-provoking and relevant. Its bold critique shows how the real world already is moving beyond investing orthodoxy.

    About the authors



    Chapter 1: The MPT Revolution Devours Its Children

    Chapter 2: The MPT Paradox

    Chapter 3: Short-Termism

    Chapter 4: Everything Old Is New Again

    Chapter 5: From Dividends in Nutmeg to Creating $5 Trillion





    Jon Lukomnik is the managing partner of Sinclair Capital LLC, a strategic consultancy to institutional investors, and a Senior Fellow at the High Meadows Institute.

    James P. Hawley is Head of Applied Research at TruValue Labs, San Francisco and Professor Emeritus School of Economics and Business, Saint Mary College of California.

    "If you want to know what is next in finance and investing, read this book. Lukomnik and Hawley expertly show how financial theory got us here, the limitations of that theory and what is poised to take its place in the financial markets of the future." — Matt Orsagh, Director of Capital Markets Policy, CFA Institute

    "Lukomnik and Hawley provide an insightful case for the need to modernize Modern Portfolio Theory. Investors, academics, and everyone interested in finance and a sustainable future should read it -- it will challenge how you think!" — Caroline Flammer, Associate Professor, Boston University and Chair, PRI Academic Advisory Committee

    "This definitive analysis of the limitations of Modern Portfolio Theory and the gaps it has left behind is a must-read for anyone wishing to understand where investment is now headed. It demonstrates why and how investment must evolve in coming years and is the foundation on which forward-thinking investors are now building a new practice." — Steve Lydenberg, Founder and CEO, The Investment Integration Project

    "Lukomnik and Hawley brilliantly make the point that Modern Portfolio Theory is limited in its ability to deal with systemic risks that affect capital markets, investors and society. They highlight the increasing realization that investing success is inextricably linked to the health of the economy and capital markets, rather than just to an investor’s superior stock-picking prowess. They show clearly how investors have moved beyond diversification to act on climate change and other material ESG risks." — Sacha Sadan, Director of Investment Stewardship, Legal and General Investment Management

    "At a time of deep reflection around the purpose of companies and financial markets, ‘Investing that Matters’ steers us towards a more enlightened view of capitalism in the 21st century. It teaches us that long-term value creation is achieved beyond simple analysis of a company’s historical financial performance and encourages the reader to appreciate the importance of deeper systemic risks – ecological destruction, technological advancement and demographic shifts – which will shape the corporate governance landscape as we know it. Lukomnik and Hawley offer an important book, illuminating how modern portfolio theory needs to evolve to better serve our economies and societies now and into the future." — Kerrie Waring, Chief Executive Officer, International Corporate Governance Network

    "Moving Beyond Modern Portfolio Theory is a highly needed book, in which Jim and Jon realign finance with the real world, reminding us of its purpose. I’m delighted we can now cite it and share it with students who feel a sense of confusion and distrust when they submit financial theories to their critical thinking, and with investors in search of a sense of purpose and impact. Portfolio and investing activity clearly affect the system -- the financial, ecological, social world we live in. Jim and Jon make this argument very convincingly here, in a finance book that matters!" — Christel Dumas, Associate Professor, ICHEC

    "If you are puzzled by the current disconnect between the stock market and the real economy, but hopeful that investing can go back to its main purpose, that is allocating capital to address societal problems, you should read Investing that Mattes. An intelligent and accessible reflection on how Modern Portfolio Theory shaped the investing world we live today, and how it is now holding it back from addressing the challenges we face as a society. Investing that Matters suggests that practice is leading theory in experimenting with novel ways for investors to conceptualize and directly tackle systemic risk, through various forms of Beta activism. Still, our ability to theorize these practices is lagging. Calling for more active stewardship of investment to work on the root causes of risk, rather than playing with its statistical properties, the authors suggest the steps investors should take to take on this challenge. " — Fabrizio Ferraro, Professor and head of Strategic Management Department, IESE Business School