New global framework needed to improve global capital flows, says Prudential Investment Management in joint Knowledge@Wharton report
Policymakers and investors need to work together to rectify an imbalance in global capital flows, according to a whitepaper issued today by Prudential Investment Management, the $962 billion asset management business of Prudential Financial (NYSE:PRU) , and Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
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Arvind Rajan (Photo: Business Wire)
The whitepaper entitled The Great Mismatch: Addressing Barriers to Global Capital Flows explores issues that hinder cross-border capital flows and offers recommendations for a new strategic mindset and global framework. In developed markets, investors are sitting on under-invested capital which provides lackluster returns, while in emerging markets, public and private needs for investment go unmet.
“Correcting mismatches in capital flows represents one of the most significant opportunities for global growth over the next decade” said Arvind Rajan, managing director and head of global and macro at Prudential Fixed Income. “Success will require long-term institutional investors and policymakers to re-think long-standing assumptions and to re-shape their role in global markets.”
The paper, researched and written with close cooperation of investment professionals from several Prudential Investment Management businesses and Wharton’s scholars, lays out current barriers to efficient capital flows. Topics explored include the role of government, foundations of financial systems, and investors and their incentives.
“Opening of capital markets to more players has a potential to really transform things,” says Franklin Allen, a Wharton professor of finance. “A lot of money will come out of China and a lot of money will go into China.”
The paper identifies ways in which investors, governments, and other market participants can ensure capital is deployed more efficiently. In the near term, a new strategic mindset would accomplish several objectives, including: altering traditional investment approaches and metrics; updating investment frameworks for more accurate opportunity/risk assessment; and continuing to reduce home country bias.
In the longer term, the report says, a significantly changed global framework will require: developing new valuation tools and techniques; establishing consistent standards for governance, transparency and the rule of law; and evolving the global governance regime to better incorporate emerging-market economies.
PIM ultimately suggests global capital flows are at an inflection point and that upcoming changes will provide opportunities to improve practices and institutions.
About the Wharton School and Knowledge@Wharton
Founded in 1881 as the first collegiate business school, the Wharton School of the University of Pennsylvania is recognized globally for intellectual leadership and ongoing innovation across every major discipline of business education. With a broad global community and one of the most published business school faculties, Wharton creates economic and social value around the world. The School has 5,000 undergraduate, MBA, executive MBA, and doctoral students; more than 9,000 participants in executive education programs annually and a powerful alumni network of 93,000 graduates.
Knowledge@Wharton is the online business analysis journal of the Wharton School of the University of Pennsylvania. The site, which is free, captures relevant knowledge generated at Wharton and beyond by offering articles and videos based on research, conferences, speakers, books and interviews with faculty and other experts on current business topics. The Knowledge@Wharton network – including Chinese, Spanish, Portuguese and High School editions – has more than three million users worldwide.
About Prudential Investment Management
Prudential Investment Management’s businesses offer a range of investment solutions for retail and institutional investors around the world across all asset classes, including fundamental equity, quantitative equity, public fixed income, private fixed income, real estate and commercial mortgages. Its businesses have offices in the U.S., the U.K., Europe, Asia and Latin America, and had $962 billion in assets under management as of March 31, 2015. For more information, please visit http://www.investmentmanagement.prudential.com.
About Prudential Financial
Prudential Financial, Inc. (NYSE:PRU) , a financial services leader with more than $1 trillion of assets under management as of March 31, 2015, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit www.news.prudential.com.
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