I’ve been reading the annual reports of a few investment companies lately. It’s striking how prominently ‘assets under management' (AuM) feature as the go-to measure of success in those reports and in the ensuing press coverage. This may be of interest to shareholders but it seems to me that it’s the wrong thing on which to focus, whether you are a customer of those companies or a shareholder in them.   

 

Commercial success is not irrelevant. It’s important that investment companies are stable, can attract and keep top-quality talent, and have the scale to pay directly for original, value-adding investment research for their investment strategies. However commercial success is not the same thing as simply growing assets under management.

 

The difference in fee levels between a passive developed markets equity strategy (these days about 3bp for a large mandate) and, say, an active Emerging Markets equity strategy (maybe 65bp) can be huge. Of course, the resources needed to manage each strategy are also very different.  It’s also possible for asset managers who are experiencing performance issues to keep clients for a while by offering fee cuts and even fee holidays. AuM on its own therefore doesn’t tell us very much.      

 

Some firms who have poor investment returns may attract investors for a while through slick sales and marketing, or just building big sales teams. But if investment returns are sub-par there will come a point when no firm can sell its way out of the problem, and they will be left with a very challenging combination of high costs and low revenues. This doesn’t usually end well.

 

On the other hand, investment firms with strong long term investment returns will in the main keep their clients and most likely attract new ones. For such firms, simple visibility, fund availability, and a clear explanation of how such returns are achieved, is more important than slick marketing.

Rather counter-intuitively then, if an investment firm is struggling to attract and keep clients it should be spending on improving its existing investment capabilities rather than adding to its sales resource or acquiring assets. It may take a while, but strong long term investment performance will always build a far higher quality client base than industrial-scale marketing. 

 

So what should we be focusing on in looking at the annual reports of investment firms? I’d argue that there is one metric that captures all of the above, and it’s client satisfaction. I’d also argue that this is far more a leading indicator than AuM can ever be. Clients will typically show signs of dis-satisfaction long before they make the decision to take their money way. Satisfied clients may reduce their holdings on the back of strong performance: this reduces AuM but it’s hardly a long-term negative. 

 

Client satisfaction will clearly be performance-led, but it also takes into account non-performance factors such as responsible investing, clarity of communication, and levels of service. Properly done, client satisfaction measures should capture all of this. Show me an investment firm with highly satisfied clients, and I’ll show you a firm that has a rosy future.

 

At Baillie Gifford, we try to instil this way of thinking right across our firm. We have no AuM growth targets. We do not pay fund managers based on the amount of assets they run. Our bonus structure for client-facing people and even for most of our sales teams is determined by client satisfaction measures, not sales targets.

 

We use an independent firm to survey a cross-section of our clients every year, and from that, we get a Net Promoter Score. This measure of client satisfaction feeds directly into variable remuneration and incentivises selling the right strategies to the right clients at the right time, putting the interests of existing clients first and building trust through the inevitable cycles of investment performance. 

 

Baillie Gifford is not a listed company and has no outside reporting requirements. But if we were and we needed to produce an annual report, I know what metric I’d point our shareholders to. It wouldn’t be AuM.

 

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