Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… and reviews fund manager cultures
In the face of an ever-increasing wave of issues surrounding culture within funds management businesses, Frontier has become more aggressive in its approach to assessing culture within the businesses managing its client funds.
Frontier, which advises on about $450 billion, has always assessed and considered culture within the context of developing manager ratings and recommendations, as have the other major advisory firms.
However, significant manager events over recent years have prompted the adviser to amplify its processes and weightings around the assessment of culture as a component of suitability for investors, according to Paul Newfield.
One of the most recent and high-profile examples of concern relating to AMP’s handling of a sexual harassment claim and the subsequent promotion of the executive involved. Newfield, director of sector research, said last week (March 10) that Frontier had been escalating its focus on culture over a number of years and are set to introduce higher hurdles for managers to clear.
“As part of our research and due diligence process we are now making explicit statements and assessments of traits we are seeking from managers in the area of corporate culture,” he said. “And, when issues do arise, or even signs of concern, we have developed an internal framework to help us fully explore those cases.”
Previewing a paper to be published in April, Newfield said: “Unfortunately, we have had to test some managers via that framework already. This has enabled us to rigorously assess key areas where less tangible but critical cultural issues, which are not easily quantifiable, arise.
“We have already applied this framework to a number of cases where concerns have arisen and in some cases we’ve re-rated managers, some down sharply, when they have come up short of our expectations and for them that will mean a loss of funds either from existing clients re-allocating or potential investors choosing not to allocate in the first instance.”
Frontier’s set of culture principles outlines the key traits expected from managers seeking the consultants’ tick of approval as well the managers it already researches, which total about 1,200 worldwide.
The traits reflect treatment of clients, in terms of transparency around communication and action following an adverse event; treatment of the manager’s staff, including evidence of diversity, inclusion and equality; reflection on and rectification of issues that arise; and a lack of any patterns of systemic behavioural and cultural issues.
“People should not underestimate the need to properly examine the existence of these traits and the work needed to assess these factors. These traits sit on top of, and are conducive to, the ability of the manager to deliver desired return outcomes,” Newfield said. “A failure here is likely indicative of imminent failure across other more quantifiable parts of their business.”
Frontier’s investment governance team is currently completing a research exercise examining culture more deeply, attempting to answer questions such as why it is important and how asset owners and advisers ought to embed culture and its assessment into manager research.
The paper due to be published next month is titled: “What lurks in the shadows?”
