EUROPE – The asset management industry as a whole fails in expertise, discipline and reliability, according to the latest paper from the influential 300 Club.

Furthermore, these failings are a result of financial conglomerates, a lack of focus and short-term career risk, according to Lars Dijkstra, CIO at Kempen Capital Management and the paper's author.

And he says asset management will have to reinvent itself to bridge the gap between what clients want and what asset managers offer.

Dijkstra points out that the 1980s and 1990s were a period of rapid growth, in which a growing number of asset managers became part of a listed financial conglomerate, leading to tremendous consolidation.

"But big does not always mean beautiful, and the larger the asset manager, the harder it proves to achieve outperformance," he says.

Furthermore, his paper argues, sales departments of large asset management firms are driven by a product focus and profit motive, marketing funds that appeal to the public, but which are most often yesterday's winner.

"The question of what the client really needs is insufficiently addressed," he says. "Before long, this approach will leave the client disillusioned with disappointing absolute returns.

"And as a result of an excessively short investment horizon, index-hugging and transaction fees, most investment funds fail to deliver added value after active fees."

Another problem, according to Dijkstra, is that business managers running asset management firms often focus on the short-term interests of their shareholders because they want to secure their bonus and their job.

"Therefore, they are disinclined to take risks that may, in the long run, add value for the client," he says.

"At the same time, portfolio managers are under pressure from benchmarks and have to achieve short-term success, or their career will be jeopardised.

"There is a fundamental mismatch in horizon between the interests of pension funds and the interests of asset managers, especially when these managers are part of a financial conglomerate."

He says client focus should be the cornerstone of the asset management industry, with a move away from distribution, marketing and product pushing.

"Superior asset management requires two things – creativity and decisiveness. Creativity is a matter of art and science, while decisiveness is determined by culture.

"To realise all this, three conditions have to be met – alignment of interests, focus and long-term commitment."

One step towards alignment of interests is to give employees co-ownership of the company and allow them to invest in their own products.

For asset managers to deliver added value net of fees requires the courage to take risks and to be a contrarian, says Dijkstra.

"Asset management companies where culture, philosophy and ownership are in the hands of the portfolio managers themselves have a significantly higher chance of creating value for the client," he adds.

He suggests that the emphasis should be on a limited number of high-quality activities, the idea being not to offer everything, but rather to make choices under the motto 'we do things well, or we don't do them'.

There should also be strong long-term commitment from both clients and asset managers.

In achieving all these goals, Dijkstra says the tools and options are readily available, but it will require a paradigm shift in the industry.

"We need to transition from short-term salesmanship to long-term stewardship," he concludes.

Topics