27th February 2006

"Time for some original thinking"

By AMIN RAJAN

The best way to predict the future is to invent it," said Alan Kay, originator of the Windows operating system that sparked the revolution in mass computing. He held that the future is there to be shaped and re-shaped by a handful of smart committed people.

Indeed, this has been the recurring theme of this series. The worst bear market in living memory has pushed the global fund management industry to an inflection point, marking notable discontinuities from the past. For sure, there will be strong tail winds from changing demographics and pension reforms in mature economies. But the ride will be a turbulent one.

As the chairman of a large US pension fund put it: "governments have failed to deliver decent pensions. We have fared no better, either. All hopes are now pinned on fund managers to make the private (DC) pensions work. Why would they succeed where others have failed?".

Clearly, capitalising on new opportunities is not about playing the old game better. Instead, it's about navigating through fog to invent a new game far removed from old connections and causality.

At similar junctures in their history, this is what today's global business icons have done. Their experiences tell us that the new game starts with gaining differentiation in the holy trinity of innovation, strategy and leadership.

Taking them in turn, three powerful market drivers are forcing extreme flexibility on fund managers: demand for all-inclusive global mandates, interest in liabilities matching, and the shift from "product sale" to "lifestyle portfolio management". Collectively, they mark a sea-change from the bells and whistles standardised products of the old game to customised portfolios that cater for the needs of individual clients. They require a high degree of infrastructure flexibility to improve economics of mass customisation.

The implication is clear: in the new game, rapid product innovation and process innovation have to go in tandem. In the 1990s, economies of scale - traditionally associated with standardisation - were a misnomer when applied to mass customisation, requiring huge flexibility in employee mindset and technical platforms alike. Now, no more.

"As investors' appetites for a variety of strategies has grown, our speed-to-market has accelerated, as has the evolution of a single operating platform, with tools for analytics, risk control, valuation and processing," says Richard Marin, chief executive of Bear Stearns Asset Management.

In turn, this flexibility has forced a hard-nosed approach to strategy. Three years ago, only 20 per cent of fund houses held their senior managers personally accountable for delivering business goals.

That figure has since improved to 25 per cent. Elsewhere, strategy remains strong on aspirations, weak on deliverables. Yet, the green shoots of change are discernible.

"Strategy is now about setting clear measurable goals, devoting resources, allocating accountabilities, getting the necessary commitment from staff and monitoring outcomes. Today's businesses are like democracies, with clear checks and balances," says Robert Parker, deputy chairman of Credit Suisse Asset Management. With millions losing billions in the bear market, the new economics is as much about trust as about performance.

Strategic failures in the past have created a legacy of corrosive cynicism among staff in many medium and large houses. They have to be convinced that inventing the new future is for real.

This is where business leadership kicks in. In the 1990s, it was widely confused with the buzz of the investment function, not least because most chief executives were former portfolio managers. Sound-bite leadership was all too common.

Now, leaders have their jobs cut out to: up the ante, think strategically, be first among equals, motivate staff and deliver results.

These go well beyond the craft of investment and involve understanding how markets work; what clients want; how the dynamics of asset gathering operate in different client segments; how new instruments underpin tomorrow's quality products; and, above all, how to inspire trust and motivate the movers and shakers across the business.

In the evolving environment of flexibility and accountability, this sounds like mission impossible. But it, too, is happening.

"For us, it means shepherding and nurturing individual units within our boutiques to achieve their goals while staying with the herd in global support functions. It requires a savvy person with boundless energy and a balanced ego to deal with complex personalities on the ground," says Nicolas Moreau, chief executive of Axa Investment Managers.

Amin Rajan is the ceo of Create, a research consultancy.

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