In the final article in this series, Neeraj Sahai and Amin Rajan conclude that asset mangers can no longer afford to confuse the buzz of the investment function with leadership

"There is at least one point in the history of any company when you have to change dramatically to rise to the next performance level. Miss the moment, and you start to decline," said Andy Grove, former chairman of the world's leading microchip maker, Intel.

The Japanese asset industry failed to heed his warning. A lethal combination of market losses and an ageing population has commoditised the retail savings sector by channelling a record $13trn in post office accounts - earning nothing more than nominal capital protection. Even the lingo of equity markets is now nuanced by gambling undertones.

Our latest study* shows that a similar spectre hangs over other fund markets around the world, notwithstanding the recent rally. In this decade, investors have been ravaged by two of the four worst bear markets of the past 100 years. The emergence of new risks has challenged the old certainties and exposed fault lines concealed by excessive leverage during 2003-07.

First, the buy-and-hold story has not worked, as equities were outperformed by bonds over a long period. Nor has the barbell approach succeeded, as actual returns diverged markedly from expected returns for most asset classes. Finally, nor has diversification, as correlations between historically uncorrelated asset classes shot through the roof. Trust has been the main casualty. Investors can no longer spell it.

Yet, reports of the death of the asset industry are exaggerated. Crisis is often a concealed opportunity. Worldwide, the savings glut is building up. DC plans are set to grow. Sovereign wealth funds are out prowling for new opportunities. Insurance companies are shedding their captive status and channelling ever more money to third party best-of-breed managers. Rampant budget deficits are jump-starting the global economy. Public leverage is crowding out private leverage.

However, that is not the same as saying that clients will go back to their old ways of investing. Their behaviours will change, as argued in previous articles in this series (see IPE September and October).

Capitalising on new opportunities is not about playing the old game better. Instead, it is about navigating through fog to invent a new game far removed from old connections and causality.

At similar junctures in their evolution, today's global business icons did just that. Their experience tells us that the new game starts by gaining differentiation in the holy trinity of leadership, strategy and innovation. We focus on the first two here. The last item has already been covered in our previous articles.

A time of transformation
More than 50% of asset managers are now in the middle of major corporate transformation of one sort or another, as shown in a previous article (IPE November). Collectively, they aim to promote shifts from:

Flat-footed rigidity to fleet-of-foot agility via alliances in front, middle and back office activities; Asymmetric rewards to alignment of interest via a better value-for-money fee structure; Blame culture to individual accountability via cultural changes; and Paternalism to performance via meritocratic incentives.

The current round of improvements is like the first-stage rocket - it has got the managers off the ground but it is not strong enough to propel them to where they need to be.

History tells us that business transformation takes time and persistence. Both in Europe and the US, for example, it took at least three recessions to transform industries as diverse as textiles, IT and pharmaceuticals.

In each case, new ways of thinking were more important than new ways of working. The required mindset shift could not be achieved in a single step. Mindset changes are often as durable as the crisis that provokes them.

On the upside, however, Heisenberg's famous uncertainty principle says that as soon as you touch or move something, it's never the same again. Much the same can be said about the current round of transformation. For things to remain the same, things will have to change. And they are changing.

But as they do, the law of unintended consequences has kicked in. There is no gain without pain. Few business plans survive reality.

Change creates uncertainty, uncertainty creates ambiguity and ambiguity creates contradictions, of which five are especially rife in the current phase of transformation in the global asset industry:

Cost cutting versus talent loss; Variable pay versus low morale; Product pruning versus fewer revenue streams; New products versus client needs; and Strategic alliances versus loss of control.

Balancing these contradictions is a high-wire act. It requires transformational leadership that walks a fine line between stability and change, bureaucracy and creativity, alliances and focus, self interest and client interest, doing the business and running the business. The transition to the new model requires a high tolerance for ambiguity. Few leaders have the skills to navigate it.

In the past, portfolio managers evolved into leaders on their ‘craft' ticket. Now, that is not enough. Top executives have their work cut out to (see figure 1):

Provide strategic leadership that sets the vision and builds the necessary relationships in its delivery; Display cultural sensitivity that capitalises on the growing diversity of clients and staff; Raise the bar for all aspects of business to deliver value to clients as well as shareholders; Balance contradictions inherent in running a business in an uncertain environment; and Build teams to create and sustain strong investment cultures.

In a mean-reverting world, this list sounds like mission impossible. The list is indicative, not definitive. But it is long enough to drive home a simple message: the new business model outlined in our last article (IPE November 2009) requires a blend of different styles and approaches. But how can star managers become star leaders?

Past experience tells us that grafting business and people skills on to technical expertise does not work with conventional training. Who could have trained Bill Gates? He quit Harvard! Four methods are now being used to enhance the leadership gene pool.

The first one has involved recruiting talent from inside or outside the asset management industry, duly ensuring that those who lack investment experience more than make up for it with their exceptional leadership qualities.

The second is via executive coaching, giving leaders the opportunity to have regular risk-free conversations on business or personal challenges with a trusted third party inside or outside the company.

The third involves creating a cadre of high potential individuals who are offered a variety of work experiences inside and outside the investment organisation via regular lateral transfers across geographies and functions.

The fourth involves offering formal training programmes followed by stretch assignments that also provide extensive opportunities to network with peers across the world.

Via these avenues, the next generation of leaders will be able to go beyond the craft of investment and understand: how markets work; what clients want; how the dynamics of asset gathering operate in different client segments; how new approaches can underpin tomorrow's quality products; how to inspire and motivate the movers and shakers across the business; how to migrate to a better business model; and, above all, how to create client-centric businesses.

Execution: the magic bullet
The interviews that followed our survey showed that the majority of asset mangers have yet to develop a culture of strategic thinking and personal accountability. They confuse pace with progress, activity with action. Three in every five asset managers do not hold their senior executives - at the centre or in the field - individually accountable for delivering strategic goals.

They also see strategy as a set of medium-term aspirations, not as a bumpy journey with clear short-term milestones. Nor is there the tradition of ‘failing forward' by using the learning derived from early failures to go forward faster. The blame culture is all too evident.

But there is a dawning realisation that, as in a game of chess, desired outcomes depend upon tactics and improvisation at each iteration. There are no formulae or checklists, or shortcuts. In some houses, top executives hold regular forums involving all the movers and shakers in the company, debate new ideas, and subject them to a reality check by tapping into the ‘collective memory' of the company (see figure 2).

From it emerges a set of strategic goals for the near term, along with the list of required actions. Necessary resources are then allocated, key metrics set, accountabilities identified, incentives agreed, outcomes monitored and the course correction agreed, as and when necessary.

This approach depersonalises the issues by building a consensus at the debating stage, followed by hard-nosed empowerment at the execution stage. It encourages behaviours that are self-regulatory, yet entrepreneurial. It allows for course corrections, as and when necessary.

It tackles the legacy of distrust on account of previous failed attempts at creating a viable operating model. Above all, it runs with the grain of the age-old truism: a model is only as good as the people who run it.

A global mindset is the key to creating the necessary tipping points in this process. Such forums are also being replicated within different work areas. Directly, they facilitate communication. Indirectly, they improve the quality of personal relationships.

In the process, this approach enjoins leaders to ‘walk the talk' and answer the six most frequently asked questions by staff in corporate transformation:

Direction: what are our business goals and their rationale? Deliverables: do we have the right calibre people to deliver these goals? Credibility: are our leaders resilient enough to cope with the unexpected? Impacts: how will these goals affect me and my immediate colleagues? Expectations: what is my role in delivering these goals? Motivation: what's in it for me?

Staff also want answers that are more honest than precise. In a world of uncertainty, it is better to be broadly right than precisely wrong. An honest dialogue based on doubts as much as hopes is more likely to produce a mindset change than visionary rhetoric that creates a momentary glow and not much else.

Transformational programmes currently use too many clever words to say a lot about nothing. Their rhetoric ends up promising far more than can be delivered in an environment of accelerating change. They are akin to re-spraying an old car - they improve external appearance, not engine performance.

Concluding remarks
In 1998, the Harvard Business School organised a conference called ‘Breaking the Code of Change'. The speakers and participants included top business school gurus and corporate leaders from many countries. Their deliberations focused on a simple question: what creates a successful business transformation? Their conclusions duly appeared two years later in a thick volume of over 500 pages under the same title.

Their main conclusion appeared on page 473: "As we come to the end of this book, we need to assess how much progress we have made. Let's start by admitting that we have not broken the code of change. We don't yet have consensus on a workable set of principles that a practitioner could follow and reliably increase the odds of succeeding in implementing a change initiative."

This is not surprising. The tenor of their discussion ignored the transformative power of leadership.

According to our study, at this critical juncture for the global asset industry, the best way to predict the future is to invent it. This enjoins business leaders to do three sets of things if they are to go beyond sound-bite leadership and create businesses of enduring value.

First, rely more on persuasion than power. Do not underestimate the power of inertia; not everybody sees the need for change. Go with the grain of human nature and establish mutuality of interests through engagement. Acknowledge that no one has the monopoly of wisdom.

Second, be an appreciator of ideas, not a fount of them. Listening is not a passive activity. It is energetic attention to a variety of viewpoints, nuances and signals. Be self-effacing at times. Attribute success to teamwork, not the lone gun.

Third, treat mistakes as powerful learning tools. It is good if one can avoid them, but it's even better to acknowledge them when they occur. Use the resulting learning to go forward.

Each set is essential if asset managers are to create a new narrative on what they stand for and what they can deliver. After all that has happened in this decade, there cannot be a return to business as usual.

Prof Amin Rajan is CEO, CREATE-Research and Neeraj Sahai is global head, Citi Securities and Fund Services

* Future of Investment: The Next Move? Available free from