I spent yesterday morning listening to John Kay talk about the ideas behind his new book “Other people’s Money”. The big idea is that the UK asset management industry spends too much time talking to itself and not enough time talking with its customers. I know there are exceptions, I have talked on this blog of firms like Fundsmith and Aberdeen (where John’s talk was being held in conjunction with Prospect Magazine).
John does not believe that the search for alpha amounts to much more than an attempt to secure commercial advantage for one manager over another. Indeed his comments on trading of funds to achieve alpha chime with those of Terry Smith on this blog last week, in seeking to achieve more, most fund managers achieve less, destroying value in an attempt to outflank rivals.
Instead of this war of attrition, John suggests that asset managers focus on managing assets and searching our new opportunities for investment from up and coming businesses in the UK and around the world.
Searching for the new kids on the block
His analysis of how small companies grow to be large companies in the early 21st century suggests that raising capital on the stock exchange is not the first strategy on the entrepreneur’s mind. Private Equity, crowd sourcing and debt are the natural sources of capital, not listed equity. Kay’s analysis suggests that in their search for new opportunities , asset managers are going to have to get smarter and work harder to find the new kids on the block.
There seemed a reticence from others speaking to rise to this challenge; neither Martin Gilbert of Aberdeen nor Will Goodhart of the CFA showed great enthusiasm for developing a service that took the SME to market.
As is often the case, Kay got me to focus on Governance in a new way. By showing up the paucity of innovation among fund managers in searching out new clients and exposing the damaging impact from the hunt for alpha, he highlighted the role of asset managers in ensuring assets are properly managed.
He characterised this activity as “enhancing beta” rather than “chasing alpha”.
The problems that have traditionally been associated with governance exercised by asset managers is that the diversity of owners of a publicly listed company dilute the impact of any particular owner to enforce change. It became clear, as John talked, that were asset managers to work together – rather than compete with each other – they would have more chance of achieving better outcomes from the assets they collectively owned.
This may be a pipe dream- though there does appear to be more uniformity about what good governance looks like these days. Whether asset managers can find enough to differentiate themselves through stewardship seems unlikely and my question to the panel was how we could incentivise asset managers to focus on this aspect of their work over alpha chasing.
Incentives for better practice?
Sadly I got no satisfactory answer to my question though walking home I had a chance to discuss this with Steve Webb (someone who has done a fair bit to push the argument along). Steve remarked that the quality of asset manager’s offices said something about their attention to costs and charges and this caused the coin to drop.
Were the cost of active management (the true cost of trading) to be exposed to the public, the impact of alpha changing would also be exposed. In exposing the ruinous costs incurred by some managers, pressure would be brought on such managers to stop what they are doing and go and do something more useful instead. In short – to do Search and Stewardship.
This sounds like a bitter pill for asset managers to swallow. But as I left Aberdeen’s offices, I tweeted to Steve