Yet Oxford/P&I survey finds concept may create more stable business model
Money managers are hard-pressed to apply knowledge management, despite professing its importance in an era of intense competition and difficult market conditions, a survey sponsored by Pensions & Investments and the University of Oxford shows.
“Most respondents believe themselves to be more familiar with the concept of knowledge management compared to their organization,” said Gordon Clark, director of the Smith School of Enterprise and the Environment, Oxford University, Oxford, England. “When you broaden that question to the asset management industry, the majority (of those surveyed) believes that the industry isn't really familiar with it at all, suggesting that while there are certain asset managers who are good at it, the overall industry is probably not taking (knowledge management) seriously enough.”
Knowledge management is defined loosely as the systematic process of identifying, creating and sharing intellectual capital within a firm to gain a competitive advantage.
Implementing a knowledge management system could achieve a more stable business model for firms that don't yet have a process in place, according to 56% of respondents to the survey.
“Asset management is a knowledge industry; that's what drives us,” said Eduard van Gelderen, chief investment officer of capital markets investments at APG Asset Management, Amsterdam. Mr. Gelderen has conducted academic research on the topic and was involved in the drafting and analysis of the P&I/Oxford survey as part of his doctoral research at the International School of Management in Paris.
Mr. van Gelderen said money managers, pension funds and consultants should be asking, “How can I combine all the different parts in my organization in the best way possible way to generate the best performance? It sounds simple, but in practice, it's a very tough job.”
For organizations that already have launched a knowledge management system, the initiative does contribute to a more stable business model, according to 66% of the respondents. While a majority of the respondents overwhelmingly said knowledge management is familiar to them individually, the concept is not well understood by the industry in general.
The concept of knowledge management can be compared to an organizational memory system — “the better organized and indexed it becomes, the more enhanced is the organization's ability to use its past to improve its future,” said Dane Rook, doctoral researcher at Oxford University and a co-author of the survey. “But if (the organization) has amnesia or an overly selective memory system, we can see this as a clear impediment to improvement.”
Applied to institutional investing, a knowledge management framework should “link all the elements (of the investment process) closely together,” said Mr. van Gelderen, who is also a member of the board of APG, Europe's largest money manager with €334 billion ($452 billion). APG is owned by the €292 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands.
At APG, the practical application of knowledge management involves “finding the right strategy for pension funds, figuring out where to take active bets and to what extent. The next step involves determining whether managers have the right skill set and infrastructure to implement those strategies,” Mr. van Gelderen said.
Such an approach leads to some turnover in the external money manager lineup, he added.
For money managers, the first requirement is a deep understanding of what drives markets and of market structures. “Does an organization know what it knows? That is the first step,” Mr. van Gelderen said. “Only then can it effectively create new knowledge.”
Some organizations have launched divisions with the sole purpose of generating and aggregating ideas, as well as distributing them within the firm and beyond. Sources pointed to the BlackRock (BLK) Investment Institute as an example.
“Before the institute, we had good sharing, but if we wanted it to happen all the time, we had to be purposeful about it,” said Lee S. Kempler, managing director at BlackRock in New York and executive director of its investment institute.
“The goal is to make the sharing of market insight happen more systematically.”
Formal process needed
“The single greatest trigger for needing to be more formal about this (process) is size. A smaller firm can be pretty informal — a small group of managers who know each other can get together at one table and discuss things. But when you get to the point where not all the partners know each other, you need to set up a more formal knowledge sharing system,” he said.
Another firm using knowledge management is Towers Watson & Co.'s Thinking Ahead Group, eight people who don't have day-to-day client consulting responsibilities and are encouraged “to challenge the conventional wisdom,” said Chris Ford, head of investments for Europe, Middle East and Africa at Towers Watson, Reigate, England. (He is not in the group.)
“We deliberately chose a diverse group of people,” Mr. Ford said. “If you want people to think independently, you have to have the framework that encourages that.”
Knowledge of the investment strategy, which has nothing to do with predicting the future but an understanding of where the arbitrage opportunities are, is another important factor, Mr. van Gelderen said. “The manager should be able to combine everything in best way possible, from the people they hire to the infrastructure, and connect all the dots in order to make (the investment strategy) work,” he added.
David Kabiller, co-founder and head of client strategies at AQR Capital Management, Greenwich, Conn., said, “Using knowledge management to generate performance edge is in the DNA and culture of the firm.”
Key elements of the company's knowledge management system include “breaking down silos so that innovative ideas don't lie dead in a corner within a certain silo somewhere” and emphasizing “a culture of great debate internally and externally to avoid group thinking,” Mr. Kabiller said.
Compensation is also tied to idea generation and innovation, as well as the ability to distribute and engage others with their work. At AQR, knowledge management “is in the messaging; it is discussed in reviews and influences who makes partner,” he added. AQR had $83.7 billion in assets under management as of June 30.
About 74% of the respondents to the P&I and Oxford survey see knowledge management as “always important” to their organization, according to the 243 respondents of the survey, conducted online between Aug. 19 and Sept. 9.
Half of the respondents said knowledge management is most meaningful in portfolio construction, followed by innovation or idea generation. Some also mentioned risk management and strategy execution as activities in which knowledge management proved useful.
“Knowledge management within an organization has become a more important part of the investment process, particularly in a world increasingly subject to risk and uncertainty,” said Mr. Clark.
“One of the common threads across successful managers is that they practice critical thinking skills across all aspects of the firm,” Mr. Rook noted, mentioning Bridgewater Associates LP, where “the idea of self-reflection is built in.”
According to the results of the survey, when generating beta returns, explicit knowledge — which is generally defined as knowledge that can be codified and distributed — is generally viewed as more important than tacit knowledge, which is knowledge that's particular to an individual, and difficult to codify. However, when generating alpha, tacit knowledge is more important, respondents said.
“On the one hand, asset managers claim that knowledge management is very important,” Mr. van Gelderen added. “On the other hand, if you really look at the reality, a coherent knowledge management system is actually extremely limited (in asset management). Many struggle to put it into practice consistently across the company.”
A key element in a sound knowledge management system is ensuring that mistakes are not repeated. At Research Affiliates Inc., which had $149 billion in assets linked to its strategies as of June 30, part of the firm's knowledge management process includes post-mortem analysis on any error, combined with routine checks on inconsistencies in the investment models, said Katrina Sherrerd, chief operating officer at the firm in Newport Beach, Calif.
Barriers that prevent companies from maximizing their knowledge management systems are often structural, such as costs related to investment technology, sources said. But there are other barriers: According to the survey, 36% said the biggest hurdle is the tendency for portfolio managers to protect their knowledge in order to gain a competitive edge.
This is “a classic question when it comes to knowledge management in the asset management industry,” Mr. Clark said.
“It goes to the tendency for star performers to want to protect their knowledge from everyone else, yet it's this knowledge that might benefit the company as a whole and even those star managers themselves. Barriers for sharing knowledge harm the whole organization.”
Another 37% said compensation structures are not conducive to knowledge sharing. At the same time, 74% believe “collective knowledge of investment teams is more critical to generating excess returns than the individual knowledge of a star performer,” according to the survey.
Reporter James Comtois contributed to this story.
This article originally appeared in the September 30, 2013 print issue as, "Knowledge management underutilized".