Asset managers raise alarm

Popular movements seem more likely to emanate from camped-out protesters than boardrooms, but a new organisation headed by Hermes Fund Managers acting chief executive officer Saker Nusseibeh has the ambitious aim of radically reforming the investment industry.

Nusseibeh (pictured) and nine other prominent chief investment officers of asset management firms around the world have combined to form The 300 Club.

As the club’s chair, Nusseibeh says the organisation’s aims are to encourage debate challenging the basis of modern financial theory in light of the systemic failings that have led to the global financial crisis and the current sovereign wealth crisis.

“Something is wrong with the system, that is why we had the crash of 08,” Nusseibeh says.

“If you don’t think something is wrong with the system then just look across Europe and see what is going on.

“If you really haven’t worked out that we need to re-think the whole of financial theory then you are living in a different parallel universe.

“We must think about these things, because if we do not the consequences, not just for the financial system but by implication for society, are dire.”

The 300 Club held its first meeting in London in October and will publish its first paper by the end of the year.

Nusseibeh says the club wants to encourage debate that will bring into the open many concerns already held by investment professionals.

They hope their efforts will encourage regulators, governments and clients to join in the discussion. Their initial efforts have already attracted several more fund managers looking to join the club, Nusseibeh says.

“The more we engender debate, the more people will notice and the more people will join us because this has to be a popular movement if you like,” he says.

The club argues that current economic and investment trends will change the investment landscape over the next 20 years, with investors now at a “crisis point” where conventional modern portfolio theory and risk models have been found wanting.

Nusseibeh points to the recent moves by European regulators to issues rules pushing pension schemes towards holding significant amounts of government bonds as an example of how good intentions based on traditional financial theory can lead to unintended consequences.

He says, while regulators may have been trying to manage risk in the system, the unintended result may have been to herd investors into over-priced assets and to starve equity markets of risk capital.

“This industry is the conduit between a nation’s savings and its risk capital allocation and is, therefore, of prime importance,” he says.

Along with encouraging transparent debate, the club also wants to tackle the growing complexity of financial products, models and instruments.

Saying the financial industry “loves complexity”, Nusseibeh notes that other human endeavours such as medicine, mathematics, astronomy and art have sought to value simplicity and minimise complexity.

“We have to start wondering why we as an industry believe in complexity,” Nusseibeh says.

“I think it gives us two things: it gives us more things to do as an industry; and a false sense of security.”

The club, along with issuing papers and debating is also looking at the professional standards of fund managers.

Nusseibeh argues that the industry has become myopic in its view and asset managers need to consider it part of their fiduciary duty to investors to step back and consider the broader landscape in which they invest.

“Over the last 10 or 15 years the industry has moved from holistically looking at its client base to becoming much more focused on delivering a very specific product and not caring about what is happening outside that little box – we have to look at the total picture,” he says.

The members of the 300 Club will peer-review papers that are being written, and intend to time their release for key investment conferences next year.

Nusseibeh says that those that have already joined the club realise that there is both personal and career risk in speaking out about the status quo.

But members of the club feel they have a duty to shine a spotlight on irrational and dangerous market behaviours and assess their implications for society as a whole.

“People don’t want to rock the boat,” he says.

“Fund managers used to be the ones that were seen as fiduciaries with a small f for their clients’ money and I think it is time they went back and took up that duty again.”

The members of the The 300 Club

Members of the 300 Club:

Saker Nusseibeh Hermes Fund Managers(Chairman of The 300 Club)

Zuhair Mohammed Aon Hewitt

William De Vijlder BNP Paribas Investment Partners

Prof. Amin Rajan Create Research

Lars Dijkstra Kempen Capital Management

Adriaan Ryder QIC

Robert Talbut Royal London Asset Management

Alan Brown Schroders

Dylan Grice Société Générale

Yves Choueifaty TOBAM