The Economics of Fund Management by Ed Moisson;

Author:Ed Moisson;
Language: eng
Format: epub
Publisher: Lightning Source Inc. (Tier 3)
Published: 2022-06-15T00:00:00+00:00

Figure 6.1 UK retail investor average holding periods: (years)

Source: Investment Association, Investment Management in the UK.

As mentioned, understanding this dynamic matters as it reveals the tensions inherent within an asset management company, which leads to a better understanding of the way any of these businesses are run. For example, this can provide a barometer against which the actions or claims of an asset manager can be measured by prompting the question: in what way does this help the long-term growth of client assets?

Asset managers are well-aware of the criticisms they receive for paying relatively large salaries and achieving high profit margins while many actively managed funds fail to outperform market indexes or their passively managed peers. It is often for this reason that firms or their representatives are keen to point out other roles that asset managers play in a capitalist economy, often linked to the role of active managers in particular. This was shown in one investment analyst’s paper that compared passive funds unfavourably to an economy run on Marxist principles, while making the case for active managers being “a force for social good” (Fraser-Jenkins 2016).

It may well be that fund managers, via mutual funds or institutional mandates, serve a role in a capitalist economy by supporting companies, perhaps most influentially smaller companies, in this way. But it does seem to be a rationale based on hindsight: retrospectively fitting a purpose onto the investment industry that is a by-product rather than its reason for existing. Some, even many, asset managers see their role as allocating clients’ capital to companies that they believe will grow over the long term and where their involvement will help make that growth sustainable (i.e. investing), rather than solely picking stocks that they think will rise in the near future (i.e. more akin to gambling), but that does not mean this is the reason why clients give asset managers their money. And this is before any discussion of whether the fund management industry is really the most efficient way to allocate capital to companies if it was not for these firms’ primary, overriding purpose.

This distinction between investing and gambling underlines the need for asset managers’ effective engagement with investee companies in order to deliver on their obligations to clients. Engaging with companies goes beyond simply providing capital and involves interacting with their management teams and ultimately holding them to account. In this way, the rationale for an emphasis on engagement does not come from an abstract social purpose or an extra justification for charging fees. Instead it comes from asset managers’ obligations to clients and to secure their long-term goals, effectively acting as stewards of their clients’ assets. Stewardship and engagement are thus interlinked and sometimes referred to interchangeably. Seen in this light, the increased push for asset managers to consider the environmental and social impact of the companies in which they invest are entirely logical and suggests an evolutionary step in the management of investments that some firms took up many years ago.

These two

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