The Lost World of Asset Management
How is it possible that we can know so little about asset management, a business responsible for assets approaching $100 trillion?
For an activity that touches billions of people and millions of households across the world it is remarkable that the history of asset management is at best, barely known, and at worst badly misunderstood. This results in a public profile that is less developed than it should and is often confused with banking. Careless and stupid bankers damage the reputation of the broader financial services industry more widely than they can ever know. But, asset management does not help itself either when so little is known about where it has come from: if you do not know where you have been then how can you know where to go?
We are all creatures of the past. Often, we simply don’t know it. Why don’t we understand?
As Mark Twain allegedly said “history does not repeat but it rhymes”.
Globalisation has been with us for centuries and we need to remember that it is not a modern day phenomenon. In 1868 an investment portfolio of emerging market debt (termed ‘foreign and colonial stocks’ at the time) established by Foreign & Colonial, was invested in 15 countries spanning the Americas (mainly South America which was much wealthier than North America at that time), Europe and Asia. More than 100 years later ‘emerging market’ investment once again became fashionable after the term was coined by the World Bank in 1981.
When the market economy was under threat in the 1920s and 1930s, owing to the 1929 Wall Street Crash, the collapse of the international currency system and protectionism, asset management re-invented itself in the shape of the mutual fund in the USA and the unit trust in the United Kingdom. Regulators and consumers reacted sharply to the failures of the financial system, particularly the abuses by investment companies in the States, and new methods of channelling savings were established. After the Global Financial Crash of 2008, it is the puzzle of the dog that hasn’t barked. Why hasn’t asset management responded more forcefully to the events of 10 years ago?
We continue to make irrational financial decisions much of the time based on emotion and an inability to evaluate risk correctly. Why don’t we learn from investment mistakes?
We know about poor financial decision-making from the behavioural finance work of Kahnemann and Tversky after the 1970s. Maynard Keynes, the British economist and a prolific investor, was writing perceptively about these matters – psychology and its relationship to investment - before the Second World War. As a contrarian investor himself and an acute observer of the Great Depression, Keynes was fully aware of behavioural pressures on the individual and also the mass psychology of the market. Keynes was clear that these pressures produce sub-optimal investment outcomes. Importantly, Keynes did not view this simply as abstract economic thinking because he applied his analysis to his own investment decisions. In practice, he changed from top-down speculator in the 1920s to a bottom-up, income-focused, longer-term investor in the 1930s. Keynes learnt from his own mistakes, arguably something every institutional investor needs to do.
Where next for asset management?
The original practitioners of asset management, from the nineteenth century onwards in Britain, provided a high value added, professional, fiduciary service at an economical cost and above all had a social purpose beyond simply maximising returns or beating benchmarks. As passive management, in its various forms, begins to dominate perhaps todays asset management industry needs to return to its roots or, at the very least, understand those roots?
Nigel Morecroft is a former institutional asset management professional and a Fellow of the Royal Historical Society. His book, The Origins of Asset Management from 1700 to 1960, was published in April 2017.