By Carol Geremia*
The importance of a healthy organisational culture is well-known and thoroughly researched. In some senses, it is one of the most well-trodden modern-day management nostrums, trumpeted in hundreds of PowerPoints, mission statements, media releases and home-pages, and long since departed to the graveyard of corporate-speak cliche.
But here’s the thing – culture really does matter. Arguably, even more so if you are managing other people’s money. Although it is difficult to measure, the strength and sustainability of an investment firm’s culture is pivotal to generating long-term investment performance.
Culture plays a huge role in ensuring better investment outcomes. If ‘alpha’ – investment out-performance – is all about people, sustainable alpha is all about culture.
But how you view the notion of culture itself is critical and it separates those investment firms that see it as a vital ingredient from those that merely pay it lip service.
Culture is usually defined as a noun: the beliefs, customs, and social behaviour of a particular people or society. But when you look at the verb, ‘to culture,’ it literally means ‘to maintain tissue, cells, bacteria, etc. in conditions suitable for growth.’
To facilitate long-term, sustainable investment success, it is vital to “culture” the conditions suitable for sustained excellence – whether it is people’s personal growth, the growth of the business, growth of relationships with clients, or growth in performance.
At MFS Investment Management, we have analysed data gathered over long time periods which show that the most successful investment management businesses are led by people who really understand and nurture a collaborative culture within their organisation and understand how to leverage it to generate excess returns for their clients. There is no doubt that culture clearly differentiates the top firms from the average ones.
Maintaining a strong culture within an investment firm requires looking at the Four Ps: philosophy, people, process and performance – with the first three P’s being the means, and the last P being the ends.
Culture informs philosophy — a firm’s collective beliefs. Culture is also all about people – and the society in which they operate. And culture supports the process of effective decision-making – the way people behave.
Of the four, people and process have the most impact on the performance and success of an investment firm. Being a people business, the only real asset a funds management business has is its people. It is vital to get this right. Process is all about effective decision-making – it is the way that people work together to arrive at decisions. A strong culture focuses on the process, rather than the outcome. This sounds obvious, but the funds management industry is littered with frequent instances where culture has been brushed aside to achieve misguided outcomes.
In the investment industry, the classic example is ‘short-termism’ – the reactive focus on the short term. ‘Short-termism’ is one of the main “negative behaviours” that an investment firm’s culture has to overcome. Over-confidence and confirmation bias are just as bad – and just as common.
It is no secret that investment horizons have shortened to the point where true skill is nearly impossible to demonstrate. This problem is well recognised and understood by all in the industry. But when you look at the data, as sourced from the CFA Institute Short-Termism Survey May 2008, more than two-fifths of investment managers have more than 50% of their compensation based on yearly performance, and four-fifths of managers have less than half of their remuneration based on longer-term performance results. This only exacerbates the problem of short-termism.
Similarly, over-confidence and confirmation bias are a common feature in the investment game. At the heart of investment management, there are smart, intelligent people. People that strive for excellence, have high levels of integrity, and are probably very gifted investors. You want those people at a firm because they’re going to drive a lot of value. But quite often, there’s a big problem that comes along with this – they believe that they are the smartest people in the room and they don’t necessarily embrace the concept of teamwork.
Specialist investment management research firm Focus Consulting Group coined the term “Red X” to describe such people: the star performers who don’t fit within a collaborative culture. The ‘Red X’ can be a problem, or an asset depending on how they are managed. They’ve got great talent, but they don’t usually like to be managed all that much. With the Red X-ers, there needs to be much more focus on talent management coupled with the business courage to ensure that integration and collaboration can still flourish – or be “cultured” within the business.
This culture management imperative is heightened for active fund managers. Central to active management is the concept of promoting creative tension: It is a fundamentally important ingredient in generating superior returns. Active managers are not paid to come up with obvious ideas. When clients employ an active manager they expect them, quite rightly, to unearth the hard to find stuff that nobody else sees. For an active manager, this is only possible if there is a strong sense of collaboration within the investment team because no one person can do this alone.
This is the human resources challenge: to ensure ‘fit’. If you don’t have ‘fit’ you’re not going to get engagement. To be effectively collaborative, you want cognitive diversity, you want debate, people challenging each other, but you also want them to ‘fit’ together and share and trust each other. Certainly for an active investment manager, you want contrarian thinking, you want healthy tension, it’s critical.
If an investment firm can culture the Red X-ers into a collaborative framework, they will add significant value, which goes a long way towards ensuring investment and business success for the firm. Without this, a firm’s culture will ultimately be destroyed.
*Carol Geremia is the president of institutional advisors at Boston-based, MFS (Massachusetts Financial Services) Investment Management. In this role, she oversees asset management for the company’s global institutional clients and discretionary managers, which include corporate pension and defined contribution plans; public pension, multi-employer plans, investment authorities, and endowments and foundations. She has studied culture over three decades in the investment management business, and delivered a presentation on culture to institutional investors in Australia and New Zealand at the annual MFS Global Investment Forum in February 2014.
