Tag Archives: Investment Management Association

03.16.16
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Peanuts, monkeys and why the idea of investing for the longer term is a no brainer

As part of my multi-disciplinary Master’s degree, I did one unit in the Business School about business strategy. There I sat in a lecture room full of keen-eyed, shiny business students and me, the curious arts student whose entire career has been in the private sector, a large chunk working in investment.

As with many clichés that were trotted out during that course, the one that just made my heart sink due to its sheer lack of critical thinking, was the old chestnut “if you pay peanuts, you get monkeys”. I countered that actually, sometimes if your incentive packages have large sums of money tied to short-term performance at its centre, you create the perfect environment for monkeying around. Sub-prime mortgages and the GFC anyone?

So imagine my reaction when I read last month that some of the gorillas of the investment world were holding secret summit meetings to “encourage longer-term investment and reduce friction with shareholders”. The Financial Times’ supplement FTfm reported that meetings were held with Warren Buffet, the chief executive of JPMorgan Chase Jamie Dimon and the heads of heavyweight investment houses Fidelity, Vanguard, BlackRock and Capital Group.

The investment industry were obviously concerned that they were not aligned with the requirements of listed companies looking to grow their business; or their actual end-customers, you and me, who invest for long-term wealth development. At the top of the companies’ complaint list was the institutional shareholders focus on short-term returns, compared to long-term growth goals of companies.

The problem is that the investment industry markets its short-term performance to get more of the real capital owners, you and me, in the door and boost their funds under management. It then also creates incentives for its investment staff based on their short-term performance. They are not all like that, the best active fund managers do take long-term views and engage with companies and their trading volumes tend to be less. But many others churn through trades in passive or shadow-passive funds just trying to replicate an index to make their performance targets, which are very often tied to their performance versus the index. It would be more useful for the investment industry to tie incentives to longer term performance, in line with us, the customers, many of whom are saving over the long-term for retirement.

The Association of Superannuation Funds of Australia estimates there is $AUD2 trillion invested in superannuation, of which $AU317 billion is invested in Australian equities with a further $AU183 in Australian fixed interest. Australia is the fourth largest superannuation market in the world, behind the United States, Japan and the United Kingdom.

The United States had an estimated $US23.5 trillion in retirement savings as at 30 September 2015, according to the Investment Company Institute inside a variety of retirement savings vehicles. This does not include other investment savings, just the money in vehicles designed for long-term investing. According to Goldman Sachs, 69% of the US stock market is owned by US households, mutual funds and government and pension funds. The remaining 31% is made up of predominantly international investors (16%) with the much-talked-about hedge funds holding only 4%.

The British Investment Association stated that 38% of the £5.5 trillion of funds under management are British pension funds in 2013. According to Towers Watson, the Japanese pensions funds had $US2.8 trillion under management.

That is a lot of people looking for long-term investments to give them financial security at retirement. Surely the stewards of their money should align their activities with their end-customers.

09.18.14
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The house of cards versus building economies – the shift to trading from investing

I recently finished reading What Happened to Goldman Sachs: An Insider’s story of organisational drift and its unintended consequences, Steven Mandis’s study of how the priorities of one of Wall Street’s most respected investment banks changed from providing trusted advice about long-term growth of businesses to short-term profit production for its employees and shareholders.

As a former Sachs employee, Mandis was curious about how the Goldman Sachs he joined in the 1990s, which was renowned for its customer-centric ethics and social code, turned into the one of the morally questionable actors of the global financial crisis. It tracks the drift in values since the 1970s and covers a period of rapid growth for the company and the financial services industry.

Mandis noted (pg 98) that the rapid growth in Goldman’s business meant thousands small decisions, made quickly and by many, accumulated into a significant tidal wave of change, and everyone was too busy to notice. Changes included the rise of a culture of undisciplined risk taking driven by the rising prominence of profit-making trading over advice and the dilution in the strength of its cultural norms as the business expanded quickly around the world.

More importantly it highlights the shift from banking to trading (pg 143) and how, as trading produced greater profits for the bank (rather than the clients), the culture shifted from ‘value-added vision and tilt more to making money first’ and asked the question ‘if making money is your vision, to what lengths will you not go?’.

Mandis examined what pressures existed to meet organizational goals generally caused by ‘unintended and unnoticed slow process of change in practices and the implementation of them, which in those cases led to major failures.’ This can be expanded out to the whole investment industry which, when inundated with the retirement savings of ordinary citizens into their mutual funds, suddenly had more sway with the companies than ever before.

Fund managers, wielding the investment power of the accumulation of many citizens’ funds, held more sway with company management. The power for decision-making, and the shaping of global business, resides with a small group of senior managers who make decisions with reference only to a small group of professional investors, i.e. decisions are made by those who manage the money, rather than those who provide and ultimately own the money. It is the beliefs and values of the professional investors that are represented, not those whose capital offers the companies the opportunity to continue business and the superannuation funds a chance to have a business.

Indeed, it is telling when the chief executive of the world’s largest miner BHP Billiton describes spinning off a basket of its lesser performing assets into another company as a way of ‘financial markets’ being happy. No mention is made of the values and views of the citizens’ that provide the capital to the financial markets.

It is also interesting to note that an independent senator in Australia’s parliament, Nick Xenophon, chooses to focus on the decision of the nation’s flag carrier Qantas to only consult with its largest institutional investors about controversial management decisions, rather than include the large number of smaller shareholders. He would perhaps, have been well served to question why the big institutional shareholders made no effort to listen to the views of the thousands of citizens who provide the capital to invest in Qantas. These are the citizens who may also work for Qantas, or are a supplier or contractor to the airline, or even are a frequent flyer.

It is time that large asset management houses created genuine engagement programs with their members to discovery what their investment values really are, in the context of the whole society, not just how much money they want to retire on, and base some of their decisions on that ethical compass, rather than the one that points only to the god of Mammon.

08.20.13
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Will savers have a say in Kay’s Investor Forum?

In July last year, John Kay released his Review of the UK Equity Markets and Long-Term Decision Making which examined the impact of recent behaviour in the UK equity market on investment performance and corporate governance.

One of the key recommendations was the creation of an Investor Forum, a place where a collective group of institutional investors could discuss issues affecting the companies in which they invest, collectively act on issues and advocate on behalf of savers (the people like you and me who entrust their money to institutional investors).

This recommendation was silent, however, on how these institutional investors may collect and reflect the views and values of these savers so they can advocate on their behalf effectively. It was also silent on how this advocacy and collective action be communicated back to the savers so they can see what the investors are doing and participate in an ongoing conversation about that activity.

Then in June, nearly a year after the release of the Kay Review, a number of these institutional investors, including Schroders, Legal & General, Baillie Gifford and The Wellcome Trust announced that it was setting up a working group to look at the concept of an Investor Forum. The three big industry bodies*, who represent the asset management and institutional investment groups, all back the initiative.

But will this working group consider collating the views and values of those savers or will it be a closed shop for investment professionals? How will they rank the issues on which they act collectively and on which they advocate? What safeguards will be in place to ensure they do what they promise to do and act upon the long-term interest of savers, not just as savers but as citizens, employees, consumers and community members?

A report is due out in November.

*The Investment Management Association (IMA), the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI).