RESEARCH NOTES

Building Investment Team’s for Long-Term Success

Whether it be the star manager or the rising star, a fund managers’ reason for leaving is very often the same and it is generally avoidable. Accepted theories of motivation would suggest that for well rewarded fund managers money is not the motivation to leave.

Depending on the circumstances, the point at which the investment manager and manager part company will often have become acrimonious. There will undoubtedly be blame on both sides and at this point the relationship is unlikely to be salvageable. What has led it to this point should be an area of improvement for the management of investment teams.

The annual performance appraisal that pays tribute to the managers performance and effort has likely become an obsolete tool in successfully managing investment teams. Was it was ever a relevant tool, other than to meet the uniform procedural objectives of the firm?

Whilst there is no one way to structure an investment team, a lack of formal planning is likely to be the recurring negative in many investment teams. It may be the firm will have a strategy, though it is unlikely that the investment teams will have a strategy. So why is this important?

  • The investment decisions of clients today are the result of impressions formed over past years. Trying to tactically change perceptions is unrealistic. Therefore to grow in the face of market apathy will fail. Stopping to strategically plan for growth has the potential to achieve success.

  • Investment teams often feel removed from the business. Communication is a catch-phrase but sending an email informing staff about strategic goals of the company fails inherently cynical investment teams. Buy-in from the business and the investment team can be achieved in a well-orchestrated programme of planning.

  • Similarly, there is a limited bandwidth for marketing and distribution resource. Whilst forcing every strategy to market concurrently is rarely an option, investment teams will be disenfranchised when they perceive the business is not supporting them. What often occurs is the rise of the 'cottage' sales and marketing industry in the investment team - which seeks to work around the sales team.

  • Creating commerciality in the investment team is a juxtaposition. The move to aligning rewards to outcomes is important under AIFMD. However, profit & loss based investment teams risk creating division. Remuneration planning here is essential to capture correct behaviours with appropriate outcomes. A lot of teams today are too overtly driven by their discrete revenue contribution.

  • There will be communication voids that need to be bridged in most firms. The buy-in across the company to strategic planning with investment team(s) is an effective bridge. Investment teams should not be treated with kid gloves. Their focus (or introversion), is often mistaken for aloofness which it is not and avoiding engaging them in the business will create resentment.

Therefore, what elements should be included into a formal investment team plan? At this point a diagram would generally be displayed that showed a linear depiction of a plan. However, planning is not a gimmick and it should be based on thoughtful collaboration.

Elements to consider:

  • Each investment team should be able to articulate a very clear investment objective and process. This is a value proposition and in it the team should have sound (academic) reasoning the approach works.

  • The business should be able to map for each team the optimal and honest routes to market (now and in the future) – be that domestic, offshore, institutional or retail, ETF etc.

  • Understanding perceptions of strength and weakness, articulation of approach, product features is likely the most critical.

  • Rigorous analytical review, similar to that which a sophisticated investor would undertake. This allows all process statements that are made to be tested, ensuring perception and reality meet.

  • Team planning - individual and team development and succession.

  • Financial modelling of team profitability and cost base to ensure transparency for the investment team, which can be crucial in remuneration expectations.

  • Finally a set of goals and achievable targets ahead of the next business plan review.

Granularity of planning will shift “left” issues that will meet the investment team and business in any case. Bringing to light today what will likely develop if left unaddressed must improve the profitability of the business over the medium term.

This process is about tangible outcomes and cross company engagement.

To ensure alignment, any real cost from the process should be shared (e.g. consultancy, modelling etc) and not carried by one department alone. As the benefit will be to the business, so to the cost should be shared, which will align financial interest in all camps.

Finally, all this sounds theoretically wonderful. The pushback will be time. The first time a team builds their plan it will be time consuming, and it should be.

Wealth and asset management investment teams are making multi-million pound investments and that should be the compelling justification.

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