Active should mean engaged
The turn of the year is a time for the asset management industry to discuss its views on how markets will fare in the year ahead. Unfortunately, too often these views are of little value to investors.
This is not necessarily because asset management firms are bad at forecasting asset price movements. It is rather that they have a vested interest in talking up prices. An investment firm saying that it will buy equities because it sees opportunities is enticing other investors to buy in as well. The firm may well see genuine value in the market but just by stating its views it is influencing prices. The likelihood that there will be remaining value after prices have been artificially elevated in the short term is debatable.
This would not be a problem if the financial markets had not become a haven for short-termism and greed. The theoretical role of the markets as a hub of the capitalist economy is hard to dispute. Yet, in practice, there is too much emphasis on capitalising on quick returns and too little focus on the long term.
The asset management industry should reconsider its role if this problem is to be addressed. It needs a holistic approach.
Saker Nusseibeh, CEO of Hermes Investment Management and founder of the 300 Club, has made this point particularly clearly. Investment firms, he argues, need to stop acting as if they are detached from the rest of society. They would be wise to consider the broader consequences of their actions.
The impact of investment decisions on society is hugely significant. Investment firms are part of society and their own long-term health depends on their behaviour towards others. A growing part of the investment community has embraced this challenge but little has been achieved in terms of new knowledge about how the markets work.
These challenges are particularly important in the context of active management, which is discussed in detail in our special report (pages 34-39). Truly active managers should be taking high-conviction bets on a limited number of companies they believe in and understand. More importantly, they should increase their efforts to exert influence on the governance of investee companies. Only in this way can the investment industry ensure its survival and be a force for good at the same time.