British fund managers recognise the truth in the findings of the CREATE report. One fund manager admitted that seeing it set out in black and white was “embarrassing”. There is a consensus that the industry is going through a period of dramatic change and that only the keenest will survive.
The problems with the fund management industry “are all about size,” according to Patrick Smiley, assistant director of the fund management department at Leopold Joseph. “The UK is very concentrated, with a significant proportion of the business in the hands of seven or eight very large institutions. This is self-fuelling — the larger they get, the more money they are attracting.”
The larger firms suffer the management difficulties described by the report more profoundly than smaller, niche houses. “With big institutions, it is difficult to show management flair and enterprise,” Smiley asserted. “There are so many layers of bureaucracy.”
The industry needs a sea change, maintains Smiley, but to an extent it is at the mercy of the trustees and actuaries. “They need to become more liberal with their thinking,” he said. “They have been favouring big houses, although a significant proportion of the bigger houses have had a bad time recently. But many smaller houses are extremely well-run and have talent as well as organisational flexibility. They have to recognise that and get off the fence.”
The structure of the British market also demands a different perspective than that of continental Europe, and perhaps different leadership skills, according to Peter Dencik, director of Singer & Friedlander Investment Management. “I think that one problem with the UK houses is that they are trying to approach continental European pension funds in the same manner as they do the UK ones. They don’t appreciate that there are differences.”
While UK pension funds are run by boards of trustees who are not necessarily investment professionals, on the continent pension fund managers run money inhouse, giving away only specialist mandates. For this reason, explained Dencik, “business leaders must have a background as professional investment managers. They don’t need to be running money, but ‘been there done that’”. It is a paradox for the industry, however, that the skills that make good business managers are not the same skills that make good fund managers.
Richard Eats, communications director at Threadneedle, agrees that fund management companies need to be run by people who have been successful as fund managers; Threadneedle’s own chief executive, Simon Davies, is also chief investment officer and he concurs that the pressure is on senior
management: “Mike Lipper once said that the fund management industry got big by being lucky, not by being smart. There is an element of truth in that in many cases. “We think the market is polarising, and margins are under pressure from consumers, from governments, and from new ways that business is transacted, such as the internet,” Eats says. “Large players need to have a clear strategy and a vision of where the business is headed. Niche boutiques need a clear vision, too. The middle ground is an uncomfortable position to occupy.”
As a young company, with an entirely new business team put in place in 1996, Threadneedle could create itself from scratch. It manages and markets a streamlined range of funds, and built up its staff around the idea of a team culture. Although the star culture comes in for well-earned criticism in the report, superstar managers play a role in the industry: Eats maintained that “boutiques probably need to be run by superstars.”
Recent developments in the market bear this out. As Richard Smiley noted: “Recently a lot of star fund managers have been setting up on their own, and the big houses are suffering from these losses. Flair and talent will out. There is genuine talent in the UK fund management industry. It needs to structure to manage and encourage it.”