Managing clients’ great expectations

“He was always so zealous and honorable in fulfilling his compact with me, that he made me zealous and honorable in fulfilling mine with him. If he had shown indifference as a master, I have no doubt I should have returned the compliment as a pupil. He gave me no such excuse, and each of us did the other justice.” ― Charles Dickens, Great Expectations

On my more cynical days, news of yet another merger or takeover in the investment management industry leads me to ponder why the business model of choice increasingly lies in throwing any investment product at anyone with money. Firms balloon to encompass a dizzy array of strategies and asset classes. Some of these seem to contradict, even conflict with, each other in their objectives. Active management is housed alongside passive management, asset allocation strategies sit cheek by jowl with fundamental stock picking. Quant and qualitative teams share a water cooler, talking longs and shorts. In all but exceptional cases, such as Vanguard's resolute mission to be the lowest cost provider across all its offerings, the consensus that the solution to the pressures facing active management is to drive for great scale while spreading bets seems to be the expression of a crisis of faith on the part of managements. The likely result is a dilution of unity of purpose as opposed to an industry-wide mission to better serve the needs of clients. 

A firm engaged in slash and burn across the profit and loss account while preoccupied by the mammoth systems integrations and other headaches that mergers bring seems an unlikely place to patiently foster the investment skills that their clients will need in decades to come.

It is undoubtedly true that active management is under pressure, some of its pain self-inflicted. The industry's response, greater scale, cutting costs and reducing performance volatility by increasing the range of activities is just what the micro-economist ordered. The problem is that while that prescription works well for today's shareholders of investment firms, it does little to increase returns for their clients in the immediate term and poses questions about the future. A firm engaged in slash and burn across the profit and loss account while preoccupied by the mammoth systems integrations and other headaches that mergers bring seems an unlikely place to patiently foster the investment skills that their clients will need in decades to come. When volume becomes a preoccupation, there is a risk that people and talent become commodities, mere ’revenue generators'. Also, the drive to remove the cyclicality from earnings, that dilution of unity of purpose, brings to mind the concept of antifragility. By removing the stressors and feedback mechanisms in complex systems, such as performance cycles, you may make the system as a whole less robust. We have a relatively recent example in what happened when banks came to favour volume over quality under the illusion that credit risk could be divided up and consumed according to taste. The effects may be less pronounced in asset management, but that does not mean that they won't exist. The long term cost of a more robust earnings line may be mediocrity of investment results, further galvanising the shift to passive investment.

 

Why should this matter to us? For our own partnership, the ability to thrive and grow organically through several generations of Partners is not exclusively a function of structure, nor a direct result of scale. There have been many successful investment partnerships, many of which evolved into or have been subsumed within the mega firms that now dominate our industry. Our success as an independent Partnership is as much a product of an enduring shared set of beliefs and a common investment philosophy centred around long-term growth stocks and good long-term capital allocation. We accommodate variation and self-expression, but we enjoy unity of purpose.

We listen to our clients, understand their needs and are honest with them in return about what we can deliver. 

We are under no illusions; our path is deviating from many of our peers. The relatively narrow range of skills to which we have confined ourselves are those where we truly believe that we can deliver investment excellence to our clients. This leaves us more exposed to the vagaries of performance and faddism than the 'all weather' firms that the recent wave of mergers and acquisitions (M&A) is building. But we have a solution to that. We listen to our clients, understand their needs and are honest with them in return about what we can deliver. In truth, while we would like to claim credit for being great 'product manufacturers' in industry speak, most of our best ideas for new strategies and other improvements have come from our clients. Many of our clients have been with us for decades and they understand our skillsets and how we can best help them at least as well as we do ourselves. Unquestionably, it is their insight, support and understanding that has helped us to build a successful business to date and, we believe, will continue to do so. Our compact with them is that we continue to honour their faith in us by delivering the consistency of structure and approach that has served us to train and retain good investors over generations. Consequently, we are unlikely to join the M&A cavalcade.

 

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Kathrin Hamilton

Partner

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