The
IMAhas taken over the investment affairs division of the Association of British Insurers, and will change its name next year to The Investment Association. How have these changes come about?
The IMA represents UK-based investment managers who manage over £5 trillion of UK and overseas investors’ money, and a big chunk of that is owned by insurance companies. The IMA has something called an asset management committee and the ABI had something called the investment affairs committee. When I looked at the members of both committees, they were all members of the IMA. So it made sense to bring it under one roof. We can coordinate it better; we can be stronger and be a unified voice by siting it all in one area.
IMA members work with institutional investors such as pension funds and with individual investors. How do you aim to ensure best practice in both areas?
It is not an ‘either, or’ – really the principles are the same. If you look at institutional businesses, you need to look through them and ask ‘whose money is it in the insurance company or pension fund?’. It is millions of people putting money aside every month from their wages. I don’t see a distinction between the ultimate clients, be that directly through ISAs, or indirectly through pension or insurance vehicles.
There are a number of areas relevant to all of them: how good are we as managers at gauging the companies we invest in, to help them deliver the best possible long-term returns? How good are we at being transparent about what we do and how we do it, and what the costs are? There are operational levels, engagement levels and communication levels for both institutional and retail asset managers. Institutional clients will have the capacity to get more granular information and to absorb and understand it.
For example, if I‘m working at a race car team and deciding whose engine to use, I can probably absorb quite a lot of technical information about the engine. If I am a retail car buyer, I might just look and see what the fuel consumption is.
What do the changes announced by the Government in the recent Budget on pension pots and people’s ability to access their lump sum and invest it themselves mean for
IMAmembers?
That and also auto-enrolment for pensions, and possibly the retail distribution review by the Financial Services Authority (FSA), are all game changers. I think the industry is absolutely ready to engage directly with consumers, but what it needs in order to respond to the changes are very clear guidelines from the regulator so we can start to think about more innovative solutions to lead people to good outcomes.
Last month you announced a ‘new, simple way of telling investors how much it has cost them to own units in a fund each year’. Is that a large innovation or a small but significant change?
It is significant because it is recognises that the past and the future are quantitatively very different, in the sense that you know everything about the past and you know very little about the future. That is why trying to produce metrics about cost that worked in the past and will work in the future have failed.
That quite simple separation makes a lot of difference; it has meant that we can provide a single, comprehensive and simple metric of the past in pounds and pence. It tells people exactly how their fund has performed and what it has cost them, with nothing left out. Then we can go on from there with what is called the Ongoing Charges Figure (OCF), to give people a sense of what the costs may be in the future. We are now working on the next stage – how to measure portfolio turnover rate.
Is increasing transparency and ease of use for investors a priority for you as chief executive of IMA?
Yes, but one of the things that is required to achieve it is what I would term meaningful transparency. I think there has always been a huge level of transparency but I am not sure it has been very meaningful for the investor and what we are trying to do is move beyond that.
The
IMA’s new Investor Forum has now launched as an independent body. Why was it created in this way?
I suppose there are two reasons why we are doing it this way. One is that less than 50% of the UK stock market is now owned by UK investors. If you are going to speak for the market you need to find a way to bring in people who are not obvious IMA members. The second is that there is a need to find some way of bringing together asset owners, asset managers and companies to change the rules of engagement, so that the environment for long-term thinking is more hospitable. The Investor Forum will provide a place where this can happen.
Is short-termism at the heart of the problem?
One of the problems you have at the moment, and I am not blaming any one single party for this, is that long-term thinking for investment managers can be risky for their own reputation and security, and short-term results are highly rewarded. If you think you are at a greater risk of getting fired by saying, ‘I am going to try to optimise how much money I have got in this pot in 10 years’, then there is a disincentive to do that. There is a sense that asset owners and their advisers assess asset manager performance on a relatively short-term view. That means the asset managers tend to manage their portfolios to achieve results in the relatively short-term and that means they put their pressure on companies to deliver their results in the same way.
How will the forum help to change that culture?
There are two purposes to the forum. One is to bring all those parties together to think about the long-term. We have to get a grouping together where each gives the other permission to do that. The other part is to have a much broader based group to tackle companies when things are going wrong.
How do you assess the efficacy of the regulatory regime for your industry? With the general election coming, what is your message to the political parties?
The one message we have is that everyone – both the industry and the regulators and those who charge the regulators with that duty – need to be very focused on achieving good regulatory objectives at the lowest possible cost and with the lowest possible level of complexity. Across the piece, we are far from optimal at the moment. What we want is regulation that really does its job and protects customers, but without imposing more cost or complexity that ends up costing those same customers you are trying to protect.
More generally, we are asking politicians from all parties to look at the benefits the UK Government’s Investment Management Strategy has brought to the asset management sector and to UK plc, and the opportunities it could still realise. We’d like all parties to commit to continuing the Investment Management Strategy if they’re elected – we need a long-term approach here, too.