E-Book Overview
In recent years the field of finance has exploded with innovation. New products, services and techniques abound. The risks of inflation, the volatility of interest rates, the deregulation of financial intermediaries and the unbundling of financial services have combined to present investment managers with challenges and opportunities far greater than in the past. For trustees and managers of pension, trust, endowment, and similar funds, the task of meeting the challenges and exploiting the opportunities is much more difficult. These fiduciaries must measure their investment decisions against constrained interpretations of a legal standard--the prudent man rule--that have caused it to lag far behind changes in investment theory and the marketplace. Drawing on financial history, a major opinion survey of institutional investors, and comprehensive reviews of the law and of the lessons of modern portfolio theory for prudence, this book presents a powerful case that the prudent man rule as elaborated in legal treatises and much of the case law would virtually compel a fiduciary to act imprudently in terms of financial theory and marketplace reality. In proposing a modern paradigm of investment prudence, the book uses illustrations drawn from such traditionally suspect categories of investment fiduciaries as securities lending, real estate, venture capital, options and futures and repurchaser agreements. An unusual examination of the interaction of the worlds of law and finance, this work will be of interest to fiduciaries who are subject to some from of prudent man rule and all others, including judges, lawyers and investment managers, who are called upon to interpret and apply that legal standard.
E-Book Content
Modern Investment Management and the Prudent Man Rule
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Modern Investment
Management and the Prudent Man Rule BEVIS LONGSTRETH
New York Oxford OXFORD UNIVERSITY PRESS 1986
Oxford University Press Oxford New York Toronto Delhi Bombay Calcutta Madras Karachi Petaling Jaya Singapore Hong Kong Tokyo Nairobi Dar es Salaam Cape Town Melbourne Auckland and associated companies in Beirut Berlin Ibadan Nicosia
Copyright © 1986 by Bevis Longstreth Published by Oxford University Press, Inc., 200 Madison Avenue, New York, New York 10016 Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Longstreth, Bevis. Modern investment management and the prudent man rule. Includes index. 1. Legal investments—United States. 2. Portfolio management—United States. I. Title. KF1083.L66 1986 346.73'07 86-16294 ISBN 0-19-504196-8 347.3067
2 4 6 8 109 7 5 3 1 Printed in the United States of America on acid-free paper
Statement of Advisers
We have examined the study entitled Modern Investment Management and the Prudent Man Rule directed by Bevis Longstreth in collaboration with the Salomon Brothers Center for the Study of Financial Institutions at New York University's Graduate School of Business Administration. In our opinion this study identifies and thoroughly explores the gap that exists between legal notions of prudence in investment management by fiduciaries, on one hand, and the teachings of financial economics and sound practices of investment professionals, on the other. The development of a modern legal standard of prudence contained in Chapter 4 is generally sound. It deserves serious consideration by fiduciaries subject to some form of prudent man rule and by others, including judges, lawyers, and investment managers,