There is widespread confusion about how fund managers should use new technologies such as Facebook and Twitter. But George Mitton finds they are powerful tools for generating new business and could even help boost yields
Asset management firms are wringing their hands over how they should “do” social media. It is not an easy problem to solve.
Social networks such as Facebook and Twitter can be a compliance officer’s nightmare, while interactive blogs can falter if typically tight-lipped clients fail to contribute. Then there are inevitable internal arguments with traditionalists who fail to see why an asset manager needs a social media presence at all.
And yet this technology offers a great opportunity. Social media allows companies to talk directly to their customers; to receive feedback and ideas from clients; to promote their brand; and generate new business. One boutique investment firm even believes data from social websites can predict movements of the stock market.
The industry’s confusion is partly justified, because asset management firms are hamstrung when it comes to social media. They operate in a highly regulated environment and many of them sell to institutional clients or through intermediaries, rather than direct to consumers.
Their dilemma is reflected in research by US asset management consultancy Kasina, which found that although 68% of asset managers claim to have a social media strategy, only a third have a budget dedicated to it.
Clearly there is a funding gap, one that is hard to justify given that a majority of the asset managers acknowledge a significant client demand to participate in social media. The reason for the gap is partly contained in Kasina’s findings that 63% of firms say compliance impedes their ability to use this technology.
Kevin Fletcher, compliance manager at HSBC UK Bank, explains: “If we’re engaging with customers in an open forum we can’t identify individuals as our customers. If we do, we’re putting them at risk of fraud.”
This follows the banker’s duty of confidentiality and it severely limits how asset management firms can interact with customers on social networks such as Facebook. Another obstacle is the obligation to comply with strict rules on financial promotions. “My biggest concern is making sure that anything that goes out on a website that could be classed as a marketing message is approved according to the FSA’s rules,” says Fletcher.
In the UK, the Financial Services Authority’s rules were recently bolstered by the Advertising Standards Authority, which confirmed that it regards social media spaces under its remit.
Though Fletcher insists that the challenges can be overcome with good planning, he accepts that some managers may use the compliance obstacle as a pretext for failing to engage with social media.
Mike Rowland, president of social media consultancy Impact Interactions, agrees. “The compliance issue is slowing the process down. This is appropriate, but at the same time, it’s also used as an excuse by senior executives not to get involved.”
Finding the right tools
Perhaps asset managers would feel more confident with social media if they realised that open forums are not the only way to harness this technology. In fact, for many companies a closed network is a more appropriate tool.
BlackRock is fairly typical in that it does not sell direct to consumers but via intermediaries. Instead of spending money on a Facebook or Twitter account, the company has invested heavily in a social media programme to build links with a community of independent financial advisers.
“Because of who their audience is, they’re not going after individuals to invest in their funds, they’re going after the people who advise their client base,” explains Rowland, who has watched the firm develop its strategy in the United States.
Another tactic is to create social media tools for interacting with existing clients. In the asset servicing world, for example, JP Morgan Worldwide Securities Services created a blog last year to interact with its pension fund clients. Benjie Fraser, practice lead for the company’s pension fund business in Europe, says the blog has already changed the way the company develops ideas and plans events.
“Perhaps five or ten years ago we might have put an agenda out there and just hoped people turned up,” he says. “We would never do that now. It’s much more thoughtful the way we plan agendas and look at information we capture.”
There are challenges with creating an interactive blog, of course. “Typically, pension funds like to listen but don’t always do a lot of talking,” explains Fraser. To help them “gain confidence in being interactive” the team has experimented with tools such as an anonymous comments box and anonymous polling. Fraser also makes the blog closed, to encourage cagey pension funds to comment. This underlines that an online project may be interactive and social, without being public.
Causing a stir
Could social media go a stage further and become a tool to help fund managers generate returns? Two-year-old boutique investment firm Derwent Capital believes it could. The company is launching a fund that aims to predict the movement of the stock market by analysing sentiments expressed by Twitter users. The technology is based on research published last year by the University of Manchester and Indiana University.
Derwent Capital founder Paul Hawtin explains: “Investors have always known that macro markets are affected significantly by sentiment. Emotions and how people feel on a large scale drive short-term movement. But we’ve never had the ability to quantitatively measure it. Twitter and social media as a data source are able to do that.”
Hawtin stresses that the technology does not sift social media for hints about specific companies. This is a technique employed by some traders, who might follow the Twitter reports of a worker on a BP oil rig and make trades based on that information. “We’re not looking for specific financial information but purely assessing mood states,” he insists.
Mood states can nevertheless be very powerful. In the original research, the system correctly predicted the direction of changes to the Dow Jones Industrial Average with an accuracy of 86.7%, with a three-day lag. In other words, researchers found that the way people express their mood on Twitter is correlated with the movement of the stock market three days later, though they could not explain exactly why.
Hawtin is optimistic about his project and is targeting 15-20% absolute annual returns for the fund. “I’m confident we’re going to produce some very good results and when people see that, it will really cause a stir,” he says.
However, investors will have to wait for the results. Unexpected interest from overseas investors is forcing Derwent Capital to delay the launch to restructure the fund, while at the same time it is awaiting FSA approval. Hawtin says the fund is effectively a test case for what he expects will be a glut of new investment products to trade based on information harvested from social media.
Not everyone is excited about the Derwent fund though, with some tempted to regard it as a gimmick. “I am convinced that we will later look back at this fund as a prime example of a frothy market and nothing more,” says Barry Graubart, an independent digital media strategist. “Clearly, [Derwent Capital] are appealing to investors who want to get ‘in on Twitter’, whatever that may mean.”
Graubart is sceptical that the technology will deliver any returns. “Anyone who has done any extensive text analytics can tell you how sentiment analysis remains far from an exact science,” he says.
As with all funds, Derwent’s Twitter experiment will be judged by its results and investors will be watching with interest to see if it can generate the returns it promises.
Getting it right
It seems likely that the best way for asset managers to engage with social media will depend on their client base and objectives. For some companies it makes sense to concentrate on building relationships with clients or intermediaries through closed forums.
Another strategy is for a firm to give its most charismatic fund managers corporate-branded blogs to express their opinions. This helps individual managers build personal reputations as experts in their field, reflecting favourably on their employers.
Still another tactic is to join specialist social networks to fish for new business. Some wealth managers are doing this on Family Bhive, a social network restricted to individuals with a net worth of at least £5m.
However, there is no one strategy that will fit all firms, and this perhaps explains the lack of a consensus approach; why, for instance, Pimco, the world’s largest bond manager, has a Twitter account with nearly 17,000 followers but many asset managers, as of last month, had not even created a page.
The truth is, social media is not just one tool or strategy, it is a term that encompasses a range of techniques for communicating and interacting with groups of people. With such a diverse array of tools, it is no surprise that many asset management firms do not know where to start.
But though this landscape is puzzling, it is important to recognise that amid the confusion there is an opportunity. A great advantage awaits those companies that get their social media strategies right.
©2011 funds europe