One thing is already clear about next year. The winds of change are set to blow through the asset management industry. Vested interests will resist it. They are foolish to do so.
The Financial Conduct Authority (FCA) has just announced a wide- ranging review of fund managers, consultants and financial advisors; their roles and the value they provide to customers. The UK’s Financial Reporting Council will next year start to name and shame fund managers that do not act as involved owners of the companies in which they invest.
This level of scrutiny is not a surprise and should be welcomed if it means standards improve and provide a better deal for consumers.
The UK asset management industry invests £6.5 trillion in economies and companies around the world on behalf of a wide range of customers, from sovereign wealth funds, pension schemes and insurers through to the man and woman next door and their hard-earned savings.
The industry plays a crucial role in helping customers achieve their financial goals through the efficient and effective use of capital. Responsibility comes with the ability to put so much money to work on behalf of so many people.
In his latest book, Other People’s Money, Professor John Kay put this function of fund managers more succinctly and argues that they undertake two principal roles – “search” and “stewardship” – and they could be doing better at both.
The winds of change are set to blow through the asset management industry Photo: WWW.JASONHAWKES.COM
Like other parts of the financial sector, we have seen a growth in trading and developed an insular, inward-looking focus too concerned with what each other think and trying to outsmart each other, according to Kay.
He is right. The finance sector as a whole needs to go back to basics. For fund managers this means matching savers’ monies with suitable investments over an appropriate time-horizon and then overseeing these investments.
Fund managers do need to “search” far and wide – geographically and by asset class – to look for opportunities. Fund managers should be meeting with the management of businesses before investing or lending money to them.
They should be visiting infrastructure projects and properties that are up for sale. And they should be doing their homework when they are back in the office so they actually understand how sustainable the business model is and its financial prospects.
If they don’t, they haven’t done enough work to understand whether an investment is appropriate.
Unfortunately this kind of legwork is too much effort for some, particularly those with a short-term mindset. In their search for returns, their time horizon is three months, or often less. That makes no sense. Most clients typically invest for five to 20 years, possibly for a pension they won’t draw on for years.
Cutting in and out of investments is just playing fast and loose with other people’s money, and the costs involved in this churn make it a mug’s game.
Of course short-termism is not exclusive to parts of the finance sector. Government and company management to name just two are afflicted by it to the detriment of long-term strategic decision-making.
But if fund managers adapted their “search” role, from one of seeking short-term gains in an effort to compete with peers to one focused on genuine investment for the long-term on behalf of underlying savers, it would be a step in the right direction.
Fund managers need to remember that they are investing other people?s money
It’s worth recognising though, that it can be pretty hard to find opportunities in the UK.
Infrastructure projects can be excellent investments but attractive ones are few and far between. Some are not economically viable for the private sector to be involved with. Others are so large and complex that they repel investors.
Governments haven’t always done as much as they could do to support long- term investment in infrastructure. They need to stick to their promises – something that seems surprisingly difficult to do.
When it comes to private equity the number of opportunities is greater. But the UK doesn’t sufficiently encourage an entrepreneurial spirit or innovation. It is often businesses led by people with this spirit which make the most compelling investments for private equity.
Fund managers need to remember that they are investing other people’s money. This principal of “stewardship” – acting as an involved owner of investments – is the second role of fund managers, according to Kay. Fund managers are accountable to their customers and have a responsibility to them to deliver a valuable service at a fair price.
Service does not end once we have completed the search for an opportunity and invested. Fund managers need to monitor their investments with the mentality of an owner rather than a trader, and to intervene if there is a problem.
As shareholders in companies, fund managers have an important role in holding management and boards to account. This is not simply about voting at Annual General Meetings, but having grown-up discussions on strategy, pay, risk management and governance.
As investors in property, fund managers need to be responsible landlords. On some buildings that might mean installing solar panels. Or if we buy a block of flats, we need to think of the tenants and provide an environment which they can enjoy.
Fund managers also need to be open and transparent about the fees we charge. One pleasing aspect of the FCA market review is that the regulator is looking at the costs incurred by customers at each stage of their investment, including those levied by consultants and financial advisers.
The world around the fund management industry has changed. Some have stuck their heads in the sand and are pretending nothing is happening. Others are doing the right things but not doing a good job of saying so.
Either way, change is coming and we need to embrace it.
- Martin Gilbert is chief executive of Aberdeen Asset Management
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