Are Fund Managers a cultured bunch?

  What do you think? Do they know their Verdi from their Vardy?, Van Gogh from Van Morrison, or their Rigoletto from their cannelloni? Hard to know really! But this culture thing seems to be getting more and more attention. In Ireland the Central Bank has been devoting a lot of resources to this issue and getting the banks to refresh/redefine/find their appropriate culture. My initial reaction used to be that this type of thing was a bit waffly, with little real world application. Management consultants immersed themselves in these concepts, and for a reasonable fee their clients could dip a toe in, as required. But if we strip away a lot of the jargon and think of culture as just being “the way we do things around here” (Bower), I think it becomes more meaningful in an asset management context, and should be considered in evaluation, selection and review of managers. Towers Watson and Roger Urwin have been flying the flag on this for many years. Since the early 1990s it has been a critical component in their formal manager evaluation. For them, culture is a unique ingredient in generating alpha and a bedrock on which a competitive advantage is sustained over a long term. They have published good research on the topic, seeking to define and measure what constitutes culture in an asset management context. This is by no means an exact science. Factors involved will typically include leadership, ownership, procedures, policies, diversity, respect, remuneration etc. Should we care? – or should we only care about investment outcomes. Positive culture should underpin alpha generation and importantly (in my view) its persistence. However there my be times when strong performance can disguise a weak culture. Equally weak performance can exacerbate culture issues. How does a solid asset management culture deal with disappointing performance. I read one of GMO’s quarterlies recently where they spoke about the importance of “crying over spilt milk”. This means when things go wrong, try and understand why, and see what might be done better. Other managers speak of having a WWW (what went wrong) wall, noting poor investment decisions and focussing solely on the learning points. I think that acknowledging poor performance (because it will happen!) is a necessary and positive aspect in a good asset management culture. Investors and selectors should view it similarly. In recent weeks, a named lead manager for a large blockbuster fund that had been through over 5 years of failure to meet targets, suddenly announced a decision to leave. So I presume there had been 5 years of meeting with clients justifying and defending performance and process again and again. But conviction may have morphed into stubbornness and It seems to me that the final outcome (manager departure) didn’t really do clients any favours. Maybe a culture where there was some crying over spilt milk and learning opportunities sought along the way would have served clients (and the asset manager) better.