Predictive power found in manager culture assessments

Quantitative measurements of the culture of funds management firms can provide indications of the future success of those companies and also their ability to retain personnel, a study by researcher InvestmentQ finds.

The preliminary findings of a three-year study in which InvestmentQ, a research project managed by global consultant FS Associates and advised by Watson Wyatt Worldwide and the Brandes Institute, used a web-based tool called Q-Sort to quantitatively analyse the culture of 24 American funds management companies.

Funds managers, clients and consultants all performed Q-Sort analyses on the companies in 2004, and the results were compared with the growth in funds under management and staff turnover in the ensuing three years to mid-2007.

Barry Gilman, head of the Brandes Institute think-tank, said the aim of the study was to learn “to what extent can Q-Sort be a predictor of future investment success?”.

A critical part of interpreting the results of a Q-Sort is measuring the differences among the perceptions that managers, clients and consultants have of the culture of a firm.

Sponsored Content

Where surveyed managers held similar views of their business culture as consultants, they tended to be more successful in the three years after the Q-Sorts were performed.

But where a manager’s perception of its business culture diverged from those formed by consultants, its growth in funds under management tended to slow in the following years.This outcome applied to one-third of managers surveyed, Gilman said.

“When managers were more favourable on themselves, clients and consultants were less favourable.”

The Q-Sorts also indicated upcoming staff turnover in some firms.

“Some metrics were quite highly associated with a subsequent lack of growth of assets under management and high turnover.”

Although the sample size was small, and the results tested only in a three-year timeframe, Gilman says the findings warrant further use of the Q-Sort tool.

“All of this is indicative but still powerful enough in results to say this is worth following up. As we get more managers along and look at results over greater periods of time we can get away from indicative and move towards statistical proof.”

Jeff Nipp, director of investment manager research at Watson Wyatt Worldwide, said the service helped the consultancy to “identify areas of potential concern” and conduct “more meaningful” conversations with managers about their business culture.

The tool, which is free to use, assesses whether the culture of a firm is predominantly optimistic or pessimistic, whether there is a sense of control or chaos, and whether there is tolerance of dissent, among other measurements of organisational culture.

It was first developed by social scientist William Stephenson in the 1940s, but professors Randall Peterson (who also advises InvestmentQ) and Philip Tetlock of the London Business School developed the Group Dynamics Q-Sort, the type applied by InvestmentQ.

To date, the Q-Sort database contains analyses of more than 100 managers, mostly from North America and Europe.

Leave a Comment

Sort content by

How to estimate the equity risk premium

Given the importance of equity risk premium, it is surprising how haphazard the estimation of equity risk premiums remains in practice. This paper by Aswath Damodaran at the New York University Stern School of Business examines a number of different approaches to determining the equity risk premium and why different approaches yield different values. It

Are there enough credit opportunities to go around?

Investors are all talking about the same thing –that alpha will come from selective opportunities and implementation techniques within sectors, and the next year will be less about strategic or beta bets. Specifically credit opportunities remain front and centre of the collective investors’ radar. Managers, it turns out, are all also talking about the same

Integrating ESG in private equity

The PRI has launched a guide for ESG integration among general partners in private equity,  looking at ESG within a GP organisation and within its investment process. The guide provides suggestions on how to incorporate ESG factors into ownership practices and processes, including seeking appropriate disclosure from these companies on ESG risks and opportunities and

What consolidation means for the AP funds

The five Swedish AP buffer funds will be reduced to three, a new responsible body will be set up to formulate long-term return targets and a reference portfolio, and limits on unlisted investments will be lifted under the new plan put forward by the Swedish Government. These are the findings of The Pension Group, which

Predicting equity returns with rising rates

The impact of higher rates on equity returns is a concern for investors and to some extent an unknown. But by applying the concept a threshold correlation, as done with bond portfolios with a duration targeting framework, it is possible to better understand the complex interactions between equity returns and interest rate movements. The latest

Funds must embrace data to win

Superannuation funds in Australia are not putting enough emphasis on data and technology as a tool to strengthen member engagement or as a platform for their business. There is plenty they can learn from Rayid Ghani, chief scientist for the Obama for America 2012 campaign, who was the keynote at the Conference of Major Superannuation Funds

Previous