March 2012

OPINION: Leveraging a little humility

Over the past two weeks, I’ve been enjoying the Glasgow Film Festival (GFF). It has much to recommend it. The films are various and surprising, as are the venues, which include a ship and a swimming pool; the tickets are cheap; celebrities are not particularly encouraged, though they can come if they want. GFF is, in other words, a down-to-earth affair. And there’s wonderful relief in that. No glitz. No glamour. Above all, no self-congratulation. Just good films and people enjoying themselves. Why do I share this with you? I share it because, increasingly, it seems to me this is what fund management should be like. It should be simple. It should be about quietly delivering the goods. It should not be about spin and glitter and blinding people with pseudoscience.
But it’s so rarely like that. Too often, hyperbole and self-aggrandisment are the name of the game. Explanations of what funds do leverage a mish-mash of alpha-generating jargon. Company profiles are an orgy of value-added, core competencies and rigorous this and that – all pantingly closely aligned to clients’ objectives, risk parameters and … coffee spoons, probably. A cursory trawl on the internet reveals some amusing examples. “We employ 2,905 talented people worldwide,” writes one cutting-edge world beater. What? Not one talentless moron in the whole place? This is hard to believe. “We have found that adopting a new framework and asking new kinds of questions produces new kinds of solutions,” writes another market leader. If this little piggy can prove that, I will eat all my hats – and I have a lot. You may think this doesn’t matter, that it’s the usual marketing guff everyone churns out. But it does. It matters because it is fundamentally dishonest. And it matters today much more than before because, increasingly, fund managers are in charge of people’s pensions. Much has been written about the fabulous opportunity this creates for the industry, much less about the heavy responsibility it brings. I have written before in these pages about my unhappy experiences with private pension funds. I shall not berate my erstwhile provider – AXA Sun Life  – again, for it is but one of many that mysteriously seems think it is OK to have charges that are higher than investment returns. Instead I refer you to a sobering report from Cass Business School, part of City University London. The report is about fund managers’ ability to generate returns within their own sector. According to the new report, entitled Squandering home field advantage? Financial institutions’ investing in their own industries,‘Mutual funds, banks and insurance companies are no better at picking stocks and timing the market in their respective fields than they are in industries outside the financial sector.’ This is food for thought – or, as Cass Business School puts it, “likely to fan the flames of the debate over the degree of skill fund managers possess”. As that debate rages on, it will, no doubt, be accompanied by the odd bout of self-flagellation from those who have failed “to leverage their own industry insights to generate abnormal returns”, to quote Cass Business Schoolagain. And those who have failed to generate any returns at all – to the cry of: “We must restore investor confidence!” We can argue whether “abnormal” returns are what folks are after. And I berate Cass Business School for leveraging the dreadful L-word. Nonetheless, the point is well made. “If financial institutions exhibit any investment skill at all, it should be evident when they invest in stocks of companies that are involved in the same business as themselves,’ says the report’s author, Dr Aneel Keswani. However, it is not. Taking a leaf out of GFF’s book and prioritising substance over hype won’t solve this problem. But it will be a step in the right direction. Fiona Rintoul is editorial director at Funds Europe magazine ©2012 funds europe

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