In this environment we the industry has to get its house in order. This means genuinely changing practices, rather than being short-term and defensive. It’s tough for everyone in the industry to raise their game in this way but the danger otherwise is that the regulator will over-regulate because it is not confident that the industry can self-regulate.
It is hard for the industry to get together to speak with one voice. Existing initiatives from a number of the trade associations, including the Investment Managers Association are currently working to restore trust.
This is encouraging: in the past these sorts of things have been well run by the sell side but less well run by the buy side. It’s important that all these different bodies are engaged with government to explain what they are doing.
One example of effective self regulation is the Stewardship Code, to which most participants, including Newton, are signed up. I think we could still be more vocal about promoting this work.
There are important ways we can contribute, such as shareholders publishing their voting records at companies, and communicating over instances where they’re engaged with companies on issues such as the remuneration of directors and the dilution of shareholder rights.
I think we need to set our sights on viewing people coming to us as they would a trusted advisor like a lawyer or a doctor. It’s true that up to now there hasn’t been enough focus on giving investors what they actually need. In this regard we should accept the need for regulation and shout to encourage it. However, a lot of regulation doesn’t necessarily mean good regulation. I’m concerned about the greater involvement in product design, for example.
I think the industry should be looking at fees too. We need to be mindful that we’re in a low return environment where there may be a long period of deleveraging; managers need to earn their fee. The way to structure performance fees is with a low base management fee.
We charge our fees on a four-year rolling basis. This removes the fear from investors, that if managers think they are going to miss their performance fee half way through the period, they’ll stop trying.
At Newton if we under perform one year by 50 basis points, we have to earn that back before we’re paid. I think performance fees have been tarnished by hedge funds somewhat in that this sector has taken, in addition to the performance fee, a 2% management fee. So even when they lose money they still have a sizeable fee.
The most interesting part of my career is the period following my appointment as CEO of Newton in 2001. Investors were moving from multi-asset approach to specialist single asset strategies and our heritage was very much on the multi- asset side. So as well as the corporate restructuring of a new executive we had to change in this respect.
Now we have come full circle. Probably 90% of our clients now want a multi-asset approach and I’m glad we held onto our identity. Despite the advice I was getting from consultants that we should be launching hedge funds, retaining our identity and keeping to what we knew that our clients liked turned out to be a good choice.