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The big issues in Asset Management

A matter of time

Board director and asset management specialist David Masters looks at some of the biggest challenges facing the sector in the years ahead.

As Foreign & Colonial, the first investment trust, turns 150 this year there has been a little controversy around its mooted name change to F&C Investment Trust. Despite the fact that its current appellation is a bit of a turn off to a younger generation of investors, it seems there is a cohort of traditionalists for whom this is a step too far. If all this sounds a bit familiar, it’s hardly surprising. In summary: pioneering asset management entity finds route to modernisation hindered by agents of the status quo. This has been a struggle that the whole industry has been facing for some time, except that “the agents of the status quo” have largely come from within.

There have been some encouraging developments of late. Under pressure from regulators and policymakers worldwide concerned by the sharp growth in passive funds, asset managers are finally finding their voice on the issues that count to the societies they serve. This year alone we’ve heard from some of the biggest players about how the companies they invest in need to better address executive pay, social purpose and, perhaps most tellingly, gun control. Suddenly, asset managers are starting to talk a language more familiar to their ultimate audiences on topics that matter to them.

But it’s not enough to just talk the talk. Asset managers need to live up to the lofty targets they set their portfolio companies. Easier said than done.

Take diversity as a case in point. As Gender Pay Gap reporting has demonstrated, the fund management world is not as diverse or as meritocratic as many of us would like it to be. Of course, when F&C was launched, power and wealth were largely the preserve of white, better educated men.  The evidence is that investors like their fund managers to reflect their own background and social class (1), so it should surprise no-one that the industry was forged in that image, and that its evolution hasn’t kept pace with the outside, economically-divided world. As the distribution and control of wealth both domestically and internationally shifts, so it is incumbent on fund managers to greatly accelerate the pace at which they match this.

Diversity is not just about gender either. Investment 2020 is a tremendous initiative that brings real change in at the grass roots level by targeting school leavers and graduates irrespective of social and ethnic background from beyond the privately educated and Russell Group worlds, but it’s a long-term solution not an instant fix. Attracting the best talent when you’re competing with the likes of Apple, Google and Facebook is a huge challenge when that talent perceives you as rather stuffy and antiquated, assuming it even knows who you are.

The latter is just as vital as the former, as it will help create an environment where all talent can better flourish. And by talent I do not just mean managing money, but all the services and ancillary functions that exist around it.

Effective, structural change needs to come on two fronts. Widening the “gene pool” of talent within the industry, and better utilising the existing talent that is already there.

The industry needs to start adjusting its working practices, in particular eliminating the “socialisation” that takes place within firms that leaves them largely indistinguishable from each other and prone to groupthink. To date, most operational changes have been driven more by cost and regulation rather than trying to better unlock the creative brilliance of the existing workforce. It’s a sector that is bursting with talent, it just needs to be set free.

Therefore, asset management leaders need to further rethink their approaches to workplace culture, particularly timely given the FCA’s recent discussion paper on this topic. Moreover, questions of corporate culture are becoming one of the biggest non-performance factors in manager selection among institutional investors.

Improving workplace culture does not simply mean installing Google-style slides into their offices to appear more trendy (although that would be a very “asset management” response) but requires a better understanding of how to tap into the potential already at their disposal. Given the evidence of increasing boredom within firms, this should be of paramount importance (2).

Language and communication are critical to the success of these efforts. To attract a new generation of both employees and investors, fund firms need to learn to speak their audience’s language, not the other way around. Plain speaking is one of the best and most powerful forms of transparency, because it turns esoteric data into useful, actionable information. A quick tour of the leading, UK retail fund management websites highlights the problem. The potential investor/employee is confronted by a plethora of identikit white, middle aged men, painfully repetitive visual clichés (the default image for “infrastructure” is the underside of a motorway bridge, it seems) and a lexicon that is out there on its own. If this is not connecting well to existing audiences, it certainly is not connecting to new ones at all. Worse. The common, macho language of investment is a proven deterrent to women investors, for example (3).

The regulatory action taken by the FCA against closet trackers also reinforces this issue. Aside from those fined for overcharging, a number of fund managers have been told to address their literature which does not make apparent the extent to which some of their funds are actively managed or otherwise. If the language used was clear and investor-friendly, these problems would not happen.

Many challenges remain. Volatility, technology, interest rates, and MiFID II to name but a few, whilst Brexit and all its tiny but weighty details will continue to overshadow everything we do for the foreseeable future. It’s always easy to criticise, its much harder to actually  create change, but I think this is a wonderful time to be in the asset management sector. It’s the opportunity to make a real difference.

 (1) Kumar, A., A. Niessen-Ruenzi, and O. G. Spalt, 2015. What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names, Review of Financial Studies 28, 2281-2321 (2 Ortiz, Peter), 8 August 2017. Why asset management doesn’t have to be boring, Ignites Europe, based on online poll (3) Britain Thinks, September 2016. Playing it safe, women’s views of investing, presentation at FSF event