Author: IIMI Admin

When I talk to NCI’s members, I am often struck by the commonalities. Notwithstanding different investment strategies and different fund sizes, there is always resonance when it comes to prioritising the client and acting in his or her best interests, building a symbiotic relationship that is prolonged and mutually beneficial.

These thoughts were the genesis of NCI and discussed at length in our earliest papers, laying the foundation for supporting a client-centric model of financial services that would help “fix a broken City” and herald the benefits of the

owner-managed model within boutique active asset management. NCI has kept true to that vision, and thrived upon it.

This latest paper draws upon those core concepts, which we would summarize as ‘organizational culture’, and builds a foundation for the future, drawing upon NCI’s past work and interweaving it with academic and practical authorities to draw a compelling conclusion: that the boutique active management sector is especially amenable to the development of positive organizational culture and that this leads to superior outcomes for clients.

To draw another analogy (and perhaps an investment idea for the truly long term!), planets that support life must be in a particular orbit around a suitable star: too far away or too close and you cannot have liquid water, a narrow band known as the ‘Goldilocks Zone”. NCI members, as boutique asset managers, inhabit a similar optimal zone: not too big and not too small, this paper shows that they are just right to support positive organizational culture and can do so in a way that larger active managers and passive funds cannot.

NCI supports truly client-centric asset management and invites new members who share that vision and ‘culture’. I am pleased to be able to introduce this paper and hope that it acts as a catalyst for further work and discussion to advance the asset management and financial services industries that bring so much to the vibrancy of our economies.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

The active asset management industry has been under attack for a number of years from passive products, smart beta strategies, and latterly the press and the industry regulator. Although there has been a huge amount of coverage of the active versus passive debate, the tendency has been to group all active managers together, rather than to dig deeper and differentiate between types of active manager. In this paper we explore some of the risks of passive products and highlight some of the benefits of active management.

NCI members are specialist boutiques, with an owner-management ethos and strong alignment of interest with their clients. NCI believes these key traits provide structural advantages, particularly when compared to closet index trackers which charge high fees for index-like performance.

NCI recognises the attraction of passive products, which are another tool in the toolkit for investors. For some investors a purely passive approach, or a mixture of passive and active makes sense, but the majority of investors have the information and capacity to do better by selecting active managers.

This availability of information is key. Transparency is a core value of NCI. We believe value for money is in the eye of the beholder. By providing an investor with clarity about objectives and transparency of information, they are able to make an educated decision about whether a manager can add value to their portfolio. Large institutional investors have been able to obtain detailed information on the costs of running portfolios for years. Our message to all investors is to ask managers for detailed information on costs and charges. If the manager is unwilling to provide them, that probably tells you something.

The paper ends with what we hope are helpful conclusions to guide investors, and a call to the industry to consider working together to adopt technology to ease the investment process and reduce costs.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

New City Initiative (NCI) provides a collective voice for boutique asset managers, from the UK and the Continent, which share a strong common culture focused on alignment of interest with customers. NCI’s core values are independence, alignment of interest, transparency and responsibility. To that list I would add a fifth, which is competition. In order for the industry to continue to innovate and develop new products and solutions, and improved ways to deliver them to customers, there must be healthy competition and choice.

Since the financial crisis, the regulatory and capital burdens on asset managers have grown enormously, resulting in a much tougher hurdle for start-ups to overcome. Many of our own members, now successful, established firms, have said they could not start today as they had done ten or twenty years ago. That is a terrible indictment on the industry and should be a worry for the customers it serves.

The FCA’s Project Innovate and the joint FCA/PRA New Bank Start-up Unit have addressed similar issues for FinTech and challenger banks respectively, but as yet there is nothing similar in place for asset management. This paper proposes a framework for incubation of asset management, which NCI sees as a natural extension of existing initiatives. In fact, one of the proposals is that there is an approved suite of platform solutions provided by FinTech firms within Project Innovate which can then be used, or tested, by the incubating managers. Our proposal centres around three pillars: 1) supporting innovation, 2) provision of advice and 3) a regulatory sandbox.

Within the third pillar, we argue for a lighter touch regulatory regime until the manager or product reaches scale. In reality, new managers start with the backing of sophisticated institutions which do not require the same regulatory protection as a retail investor and the sandbox environment should apply proportionality. To give an example, it seems unnecessary for a start-up firm managing £50m of listed UK equities to report transactions which can be reported by stock exchanges or counterparties. A manager that is small presents no systemic risk and the trades are immaterial in comparison to the broader market.

The FCA has indicated it is considering this extension of their existing work, and NCI encourages them to proceed and welcomes the opportunity to discuss this proposal.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners

It is no secret that the public despises bankers. Throughout history, the concept of banking and investing has always beentarnished with an image of individuals profiting from speculation or human misery – fund managers (especially hedge funds) ‘don’t make anything – don’t do anything’ and that ultimately our industry is one which exists solely to generate profits for ourselves with no benefit to our communities or mankind at large.

However, in my mind, it is the fund managers – these allocators of capital – who make the whole system work. Without capitalism and the difficult task of putting money to work where it will generate the highest rate of risk adjusted return – we would have had far fewer inventions, human advances, and wealth creation for society as a whole.

This paper, written by Richard Turnbull, goes into great detail as to why this is true. Fund managers provide liquidity, expertise, risk reduction and are also better structured to create the right culture of service and long term thinking. This helps fund managers avoid exactly the accusations of short termist speculation that are often levelled against us. Ourability to retire with dignity or fund new technologies depend upon our industry flourishing in the right way.

The problem with capitalism, as we are seeing with current events such as the vote against the EU by Britain, is that it means in many cases, brutal changes for those areas of the economy which cannot deliver the efficient returns. This means people’s lives change and this can be both incredibly painful and has long term social and financial ramifications too. To respond to these valid issues, a more sympathetic approach to investing which understands the effects of these changes (such as ESG investing) is now being pioneered, by the investing community and we at the NCI welcome this. This does not negate the need to generate returns for investors – but an understanding as regards the effects of our decisions is a good thing.

Finally – there is a view that the people behind some of these firms carry less moral weight than someone in a more vocational profession. We would dispute this, believing that taking thoughtful and difficult decisions to allocate savers’ funds to generate the best possible returns, is in itself both a hard task and one with an enormous positive outcome for savers and therefore society. We all need to generate better cultures and the NCI has taken a strong lead on this – but at the end of the day I believe that fund management is a powerful force for good and it is time that we started to celebrate our contribution both to global finance and the world at large.

I would like to thank Richard Turnbull for his excellent work here and for the engagement he brought to our group through the interviews he undertook and the fresh perspectives he generated via his links with the Centre for Enterprise, Markets and Ethics. His Centre has an important task ahead of it and we welcome the partnership we have formed together.

Dominic Johnson
Chairman, New City Initiative and CEO, Somerset Capital Management