15th March 2004

"Advantages of promoting a boutique mindset"

By AMIN RAJAN

In the eighth in the series on solving problems in fund management, Amin Rajan examines the efforts to encourage a team culture. Fund managers owned by banks and insurance companies on both sides of the Atlantic have one thing in common: they are promoting more teamwork within the overall star culture, duly recognising the "craft" nature of activities in the front office.

In doing so, they are trying to emulate the success of partnerships, such as Capital International and Baillie Gifford, or independents such as T Rowe Price and State Street Global Advisors.

Generating alpha requires a complex interaction of instinct and a creative work environment. The business, so the argument goes, needs to be organised around distinct product-based teams with their own profit and loss accounts and minimal bureaucracy.

The underlying logic rests on the view that creativity comes from personal instincts and intuitions. It is sparked by intensive interaction between people in a small group operating in a hassle free environment.

Two in five fund managers around the world are now re-engineering their businesses around product teams, according to estimates by Create and KPMG, the professional services company.

The initiative at the UK business of Deutsche AM, first reported in FTfm last month, is one of many now in progress.

The logic runs as follows. Self-managed teams promote a small company mindset in a large company environment. In the front office, at least, these teams promote entrepreneurial behaviour on the one hand and knowledge sharing on the other. As such, the teams can also potentially dilute the long prevailing "star" culture.

Research done inside one global firm shows that many alpha producers are not necessarily stars in the traditional sense. They are introverts who shun publicity and job-hopping in equal measure. The challenge is to motivate them to give their best.

Successful examples of autonomous teams, involving people from different crafts, were reported by Procter & Gamble and Volvo Motors in the 1970s. Less well known are the acute teething problems encountered on the shop floors in both cases.

To start with, most craft people were found to have individualistic styles of working, with their first loyalty to their craft, then to their peers and then to their firms. Getting them to work in teams was like herding cats.

Furthermore, as individual contributions became hard to quantify, petty squabbles became inevitable. Last, and most important, it took a while for managers to realise that teams only work when their members trust one another and display a strong sense of reciprocity.

In the fund management environment, these problems have been no less acute. Some portfolio managers prefer to rely on analysts for advice, others do not. A clear investment philosophy and process are an essential part of corporate brand. Yet they are viewed as bureaucratic intrusions by some self-managed teams. Such teams also like to do their own recruitment of staff, often bypassing the criteria set by human resources departments.

Bonus allocation is often a bun fight when performance criteria either vary between teams or are ill-defined. Teams need elaborate management information systems to monitor their progress; these are taking a while to develop.

Last, but not least, turf wars are common when it comes to ownership of client relationships. If these problems are not tackled, teams end up with a strong silo mindset.

But, these are nothing more than the birth pangs of the new ways of working. For fund managers with partnership structure or stock market quotation, these problems are less acute; they have a "one for all, and all for one" ethos. In T Rowe Price, for example, the culture of longevity has ensured that people work in teams but at the same time recognise their wider corporate roles and responsibilities. Compensation systems are also used to reinforce the right behaviour.

The key point to note, however, is that team working is not a panacea in fund management. It is part of a holistic approach. Its success depends upon the extent to which it improves investment performance, raises pension trustees' comfort level about the collective horsepower behind the investment philosophy, and enhances the asset allocation and stock selection capabilities.

Amin Rajan is the CEO of CREATE, a research consultancy specialising in new business models in financial services: amin.rajan@create-research.co.uk.