by Susan Edmunds
Economist John Kay has produced a report for the British Government, which found that most asset managers, consultants and other people in the financial services industry weren’t doing a good job.
One of the key findings of the report was that there was a problem with short-termism, driven by a decline of trust and the misalignment of incentives throughout the equity investment chain.
Asset managers had become the key players in the market, and could be divided into those who invest and those who trade on short-term share price movements. Kay said: “The appointment and monitoring of active asset managers is too often based on short-term relative performance. The shorter the timescale for judging asset manager performance, and the slower market prices are to respond to changes in the fundamental value of the company’s securities, the greater the incentive for the asset manager to focus on the behaviour of other market participants, rather than on understanding the underlying value of the business.”
Michael Chamberlain, of MCA NZ, which provides actuarial and investment consulting and advisory services, said Kay’s report underlined the fact the New Zealand investors needed to look not at short-term returns, or returns versus market benchmarks, but to look at the longer term, and whether the shares in a particular portfolio had the right characteristics for the investors concerned.
Kay said British fund managers were reporting too frequently and recommended removing the need for quarterly reporting.
Chamberlin said the number of layers between the shares owned and the investors needed to be reduced so it was clear why investors owned the shares. Investors should look for fund managers who understood what they wanted from their shares, he said.
He said many fund managers and advisers would take issue with the report’s conclusion that they are not doing a good job. But he said many of the existing models were flawed and not designed with investors’ best interests in mind. Very few performance management fees were organised in a way that aligned a fund manager’s interests with the investor’s.
“Performance management fees are designed to make the manager more money. You only have to look at the number who invest according to the market index, not sitting down and saying ‘what are the characteristics of the shares I should be buying for this investor?’”
Kay recommended replacing management fees with a form of interest in the fund, to be held until the manager is no longer responsible for it.
Chamberlain said performance should not be evaluated relative to market benchmarks but in terms of returns, growth and inflation-protection.
Kay said extra risk had been dumped on those who least understood it. Chamberlain said that in New Zealand, people confused risk and volatility. “Volatility is a reasonable way of measuring uncertainty but not of measuring risk.”
Chamberlain said the conclusion that the sharemarkets had ceased to be a way of raising capital efficiently for businesses was as relevant to New Zealand as it was to Britain. Kay suggested that asset managers could contribute more to the performance of businesses if they were more involved with the companies they were investing in and decisions such as board appointments were made in tandem with the biggest investors.
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