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Money Management

Consultants put more focus on culture before giving green light

Luba Nikulina said, ‘You need experience to be able to read some subtle signals in ... such a soft subject.’

The issue of culture within money management firms is increasingly on the radar of investment consultants that are preparing to walk away from highly rated managers based on their findings.

So important is the culture of a manager that Willis Towers Watson's manager research team this year launched a separate assessment within its due diligence process to consider culture for high-conviction-rated money managers.

The assessment, which has been used on about 40 firms so far, is implemented in the final stage of the due diligence process and has already led to the consultant rejecting two managers it otherwise would have happily endorsed.

While a manager's culture had always been part of the process, it was never a separate factor in making decisions, said Luba Nikulina, London-based global head of manager research at the firm.

"We could go away and assess the quality of investment professionals and dynamics in the team, but not the culture per se. It would pop up every now and then where our researchers would make comments, but there was no consistency there," she said.

The firm took the lead from the Thinking Ahead Institute, a WTW offshoot and a not-for-profit investment research organization, which "really helped us … to try and bring it all together and create the framework where we can go and use it as a separate assessment tool," Ms. Nikulina said.

Assessing the culture of a money manager is so important and at the same time tricky "because it is probably the ultimate manifest- ation of everything related to the qualitative assessment, and so subjective." Yet it did not get the attention it should have in the past, she said.

And so Willis Towers Watson worked with the institute to come up with a framework that was introduced as a requirement for the manager research team in assessment of its high-conviction ratings for money managers. It comprises a set of 60 questions asked at the end of the due diligence process. Originally, four members of the WTW team were involved in the questioning, but "now there will be two or three people in each asset class. You need experience to be able to read some subtle signals in discussing such a soft subject," Ms. Nikulina said.

Ms. Nikulina declined to identify the two firms rejected this year, but said one was because of concerns about leadership of the organization, with researchers unable to get comfortable with the choice.

Questions asked include:

  • Why do you do what you do?
  • What other value besides investment returns do you provide?
  • Who is the keeper of the culture?
  • How do you go about building a relationship based on trust?
  • How well do your clients understand what you do?

Learning curve

Other consultants do not necessarily make a separate cultural assessment of a firm but still place huge emphasis on the issue.

"We don't split it out as a separate thing, but it's not that we don't consider it — we do. We just feel that it underpins a lot of the things that we look for," said Nick Samuels, London-based head of the manager research team at Redington Ltd. "It is quite intangible but a lot of the things we look for that we think make a good manager are reflections of the company culture."

Researchers look at how well-aligned staff are to investment outcomes and whether portfolio managers are paid based on assets under management or strategy performance as indicators.

If managers are remunerated on asset gathering, researchers are "probably looking at quite a sales-driven culture, one that will probably incubate products, sell them when they've done well and close (them) down when they haven't. That's generally not the type of business we want to be investing with. Yes, that's culture, but something we can be a bit more tangible about," said Mr. Samuels, adding that incentive plans, rewards and remuneration can be taken as "factual, objective things to take a stab at assessing the culture."

Other elements such as managing strategies at a conservative capacity or "trying to squeeze every last drop out of the strategy" help, too, he said.

There is also some explicit culture-related considerations on Redington's "red radar," Mr. Samuels said. "When we rate a manager, we have forward-looking metrics where we say, 'why would we downgrade this manager, where could it go wrong?' "

Among the factors are three cultural elements. One is explicitly called cultural change; if one strength for the firm is a strong investment-related culture, a change that may derail that approach — such as no longer being set up to make money for the client rather than for themselves — would result in a downgrade.

"We also split out risk culture — you can have an investment-led culture but (a firm) may not be good at assessing risk." Should risk management processes start to weaken, that "could worry us and lead to downgrade," Mr. Samuels said.

Business ownership is another consideration. A change of hands can result in a change of culture, something Redington researchers "worry about and spend a lot of time looking at."

Tim McCusker, Boston-based chief investment officer at NEPC LLC, said while the consultant does not have specific culture-related questions for manager research, "we absolutely consider culture as part of our investment research process in both traditional and alternatives and have done so for many years. Culture at any organization is the collective set of norms for how professionals will interact and work with one another. The individual day-to-day interactions collectively add up to a manager's 'process.' Understanding process based on how individuals interact instead of just an explanation of how an idea goes from initiation can be revealing in differentiating managers from one another," he said.

Mr. McCusker said while there is no right or wrong culture, there are "healthy and unhealthy cultures. It really comes down to consistent expectations throughout an organization. One culture may be harsh and cutthroat while another may be kind and friendly, but the harsh culture may be the right one if it's collectively understood that's how everyone will act and if everyone is aligned toward similar objectives."

'Picking up anecdotes'

Suzanne Lubbe, senior research specialist, equities at Mercer Ltd., said the team also does not have a specific overlay, though she "can't remember a time when we didn't think about culture in our research."

Instead, researchers ask questions that can help draw out the culture of a company, such as questioning staffers on disappointments at the firm and looking for other bits of information.

"It's more picking up anecdotes here and there, piecing it together. (The global equities team looks) across a universe where there are definitely managers who have great or star performers who, on the face of it, tick the boxes; but at the end of the day investment is about trust." If the consultant finds anything that makes them uncomfortable or wary, it will be reflected in the investible rating.

She said the firm does look at whether a manager is investment- or sales-led as an indicator.

Redington's Mr. Samuels added that researchers who meet CEOs, portfolio managers, analysts, risk managers and traders have used a change in risk culture to downgrade a manager.

He recalled a credit manager years ago that began taking much larger positions on certain securities. "We felt their risk appetite was fundamentally different to how (they) behaved historically, and how we imagined it to be. That made us uncomfortable."