What Do YOU Want from a Fund Manager?
Friday, 11/21/2014 15:44
How about Google's reach and Google's access to information...?
FORBES recently published an article suggesting that Google might be poised to enter the fund management sector,
writes Tim Price on his The ThePriceofEverything blog.
The
article in question linked to an earlier
FT piece ('
Google study heightens fund industry fears') reporting that the company had, two years ago, commissioned a specialist research firm for advice about initiating an asset management offering.
An unnamed US fund house reportedly told
FTfm that Google entering the market was its "biggest fear". An executive from Schroders was reported to be "concerned" and senior executives at Barclays Wealth & Investment Management were reported to perceive the arrival of the likes of Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) on their turf as a "real threat". Campbell Fleming of Threadneedle was quoted in the
FT piece as saying,
"Google would find the fund management market more difficult than it thinks. There are significant barriers to entry and it's not something you could get into overnight."
Bluntly, faced with backing Google or a large fund management incumbent, we'd be inclined to back Google. Perhaps most surprising, though, were the remarks by Catherine Tillotson of Scorpio Partnership, who said,
"There probably is a subsection of investors who would have confidence in Google, but I think the vast majority of investors want a relationship with an entity which can supply them with high quality information, market knowledge and a view on that market. I think it is unlikely they would turn to Google for those qualities."
We happen to think that many investors would turn precisely to Google for those qualities – assuming they found those qualities remotely relevant to their objective in the first place.
So what, precisely, do we think investors really want from their fund manager? All things equal, it's quite likely that investment performance consistent with an agreed mandate is likely to be high on the list; "high quality information, market knowledge and a view on that market" are, to our way of thinking, almost entirely subjective attributes and largely irrelevant compared to the fundamental premise of delivering decent investment returns.
After roughly 20 years of the internet slowly achieving almost complete penetration of the investor market across the developed world, fund management feels destined to get 'Internetted' (or disintermediated) in the same way that the music and journalism industries have been. The time is ripe, in other words, for a fresh approach; the pickings for incumbents have been easy for far too long, and investors are surely open to the prospect of dealing with new entrants with a fundamentally different approach.
Another thing prospective digital entrants into the fund management marketplace have going for them is that they haven't spent the last several years routinely cheating their clients, be it in the form of the subprime mortgage debacle, payment protection insurance mis-selling, Libor rigging, foreign exchange rigging, precious metals rigging. Virtually no subsidiary of a full service banking organisation can say the same.
Sean Park, founder of
Anthemis, suggests (quite fairly, in our view) that the demand for a fresh approach to financial services has never been stronger. In part, this is because
"...the global wealth management and asset allocation paradigm is fundamentally broken. Or rather it's a model that is past its sell-by date and is increasingly failing its ultimate customers. The "conventional wisdom" has disconnected from its "source code" meaning that the industry has forgotten the original reasons why things were initially done in a certain way and these practices have simply taken on quasi-mystical status, above questioning...which means that the system is unable and unwilling to adapt to fundamentally changed conditions (technological, economic, financial, cultural, demographic)."And so opportunities (to take a step back and do things differently) abound. Coming back to the "broken asset allocation paradigm" – the constraints (real, i.e. regulatory and imagined, i.e. convention) and processes around traditional asset management and allocation (across the spectrum of asset classes) now mean that it is almost impossible to do anything but offer mediocre products and returns if operating from within the mainstream framework. (Indeed the rise and rise of low cost ETF / passive products is testimony to this – if you can't do anything clever, at least minimise the costs as much as possible.) The real opportunities arise when you have an unconstrained approach – when the only thing driving investment decisions is, well, analysis of investment opportunities – irrespective of what they may be, how they may be structured, and how many boxes in some cover-my-ass due diligence list they may tick (or not)."
As we have written extensively of late, one of those practices that have taken on "quasi-mystical status" is benchmarking, especially with reference to the bond market. This is an accident waiting to happen given that we coexist with the world's biggest bond market bubble.
Another problem is that low cost tracking products are fine provided that they're not flying off the shelf with various asset markets at their all-time highs. But they are, and they are.
We have a great deal of sympathy with the view that the fundamental nature of business became transformed with the widespread adoption of the worldwide web. There is no reason why fund management should be exempt from this trend. What was previously an almost entirely adversarial competition between a limited number of gigantic firms has now become a more collaborational competition between a much more diverse array of boutique managers who also happen to be fighting gigantic incumbents.
Here is just one example. Last week we came across a tweet from
@FritzValue (
who blogs here) that touched on the theme of 'discipline in an investment process'. With his approval we republish it here:
Daily checklist:8am – 10am: Read trade journals and regional newspapers for ideas on companies with 1) new products, 2) new regulation, 3) restructurings, 4) expansions, 5) context for investment ideas10am – 6pm: Find new ideas. Read 1) company announcements. 2) annual reports from A-Z or 3) annual reports of companies screened for buybacks / insider buying / dividend omission, etc.7pm – 10pm: Read books to understand the world / improve forecasts / fine tune investment processBefore each investment:
- What do you think will happen to the company and by consequence the stock price?
- Go through a personal investment checklist
- Use someone else or yourself as a devil's advocate to disprove your own investment theses
- Have we reached "peak negativity" / has narrative played out?
- Are fundamentals improving?
- Why is it cheap? Especially if it screens well in the eyes of other investors – i.e. exciting story, other investors, low P/E, etc.
Decide what will be needed for you to admit defeat / sell the positionIf you lose focus, sell all the positions, take a break and start again.Only expose yourself to serious and intelligent people on Twitter / investor letters / media and avoid the noise that other investors expose themselves to...
Fabulous advice, that has the additional advantage of being completely free. While we spend quite a bit of time agonising over the State's ever more desperate attempts to keep a debt-fuelled Ponzi scheme on the road, we take heart from the fact that – through social media – an alternative community exists that doesn't just know what's going on but is perfectly happy to share its informed opinions with that community at no cost to users whatsoever.
O brave new world, that has such people in it!
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