CHALLENGES FACED BY THE ASSET  MANAGEMENT INDUSTRY

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CHAPTER TWO ASSET MANAGEMENT

INTRODUCTION

This chapter contains the fundamental aspects of the asset management industry as background and content to this research. It starts with challenges faced by the industry and behavioural finance. The various industry myths are explored to try and understand what lies at the heart of superior investment performance. The competence of a fund manager is discussed, starting with knowledge (training, qualifications) and skills and ending with the psychological profile. Finally this chapter also explores what makes an asset manager successful with specific reference to the investment philosophy, asset allocation and the risk of underestimating the importance of culture as competitive advantage.
This chapter explores what is found in asset management/investment literature broadly, setting the scene for a more specific exploration of the systems psychodynamic world of the fund manager discussed in Chapter 3.

THE ASSET MANAGEMENT INDUSTRY

The financial services industry is now the largest sector in the South African economy, causing a flood of young graduates to make it their preferred destination for their careers.
According to Bogle (2009, p 40-41) the number of Chartered Financial Analysts (CFA‘s) has reached a record high of 82 000 and Barrons‘s recently reported that ―no fewer than 140 000 new applicants – also a record high – from every corner of the earth are queued up to take the exams that will confer this qualification on the lucky ones. The question begs to be asked whether their motivation is aligned with what they can get from society rather than what they can give back to it – leading to the issue of the disconnect between cost and value in our financial system.‖
The financial services industry will face its biggest challenges ever over the next few years or so in terms of the rapidly changing and ever-increasing regulatory environment and complexity. In this more competitive, more complex environment, asset management firms have to be smarter about investment choices, managing the firm‘s costs, and keeping an increasing wary group of investors satisfied. Overall it requires much more business acumen than it used to (Marcus & Bacon, 2004).
Asset management companies manage assets (money) on behalf of their clients to achieve specific financial objectives within guidelines in terms of which the investment pool is organised. Fund managers can invest in any range of investment vehicles, including equities, fixed-income securities, and derivative products such as options and futures (www.wetfeet.com/careers-and-industries/careers/asset-management.aspx).
In view of the above, asset managers have a general duty to place the interests of their clients above their own interests and those of their personnel. An asset manager owes his/her clients a fiduciary duty to act on their behalf — in good faith, with honesty, with trust, with care, with candour and solely in the clients‘ best interests—unlike a contractual duty allowing a party relatively broad discretion to pursue their own self-interest, subject to a loose good-faith constraint (Morgan, 2008). A fiduciary is an individual or institution charged with the duty of acting for the benefit of another party in matters falling within the scope of the relationship between them. The duty required in fiduciary relationships exceeds that which is acceptable in many other business relationships because the fiduciary is in a position of trust. Therefore fiduciaries owe undivided loyalty to their clients and must place client interest before their own (AIMR, 1999).
In addition, a firm with a fiduciary duty has the following obligations (Morgan, 2008):

• A duty of loyalty to clients
• A duty to treat all clients fairly
• A duty to have a reasonable and independent basis for investment advice
• A duty to disclose actual and potential conflicts of interest A duty to seek best execution
• A duty to prevent personal transactions inconsistent with a client‘s interest
• A duty to ensure that investment advice is appropriate to/suitable for the client‘s objectives

The Association for Investment Management and Research (AIMR) has also been instrumental in advancing high professional standards globally through their Code of Ethics and Standards of Professional Conduct for members (AIMR, 1999). All members earn the Chartered Financial Analysts (CFA) qualification.
Producing Alpha (the excess, residual return remaining after all returns from beta risk-premia have been accounted for) is certainly vital to the business of the asset manager or hedge fund manager (Rousseau, 2008).
However, Ware (2004) stated that the asset management industry has less to do with assets and much more with people. It is an industry which is human-resource intensive, where brainpower, creativity, vision, and quality of leadership matter. Consequently, it is also an industry where a lack of people skills, accentuated by huge egos and overshadowed by temporary investment success, can take its toll and destroy an otherwise great money management firm. No easy task if one links to that the fact that the stability of the investment management firm – and that of the professional staff in particular – is highly desirable.

CHALLENGES FACED BY THE ASSET MANAGEMENT INDUSTRY

The Asset Management industry in general is experiencing challenging times based on continued volatility and the economic slowdown (Ware, 2010). The rapidly changing and ever-increasing regulatory environment and complexity also adds to a more competitive, more complex environment in which asset management firms have to operate today. A combination of factors has resulted in the total income of asset managers around the world remaining in decline.

The global financial crisis (GFC)

The world has entered into a recession which now appears likely to be one of the most severe in modern economic history (Ware, 2010). The unprecedented and worldwide financial market turmoil has highlighted the complexity and inter-connectivity of the capital markets. Large-scale corporate failures, bank bail-outs and mega-mergers, coordinated interest rate announcements by a number of central banks, record-breaking volatility and huge declines in practically all equity indices, as well as most currencies around the world, have been the order of the day. Some of the most revered market participants (including e.g. the previous chairman of the US Federal Reserve, Allan Greenspan) have indeed commented on the unprecedented nature of events as they have been unfolding. Against this backdrop the business of asset management has probably never been more challenging (Gouws, 2009). Revenues geared to the market are in decline, clients are nervous about asset values and every investment professional can feel the pressure. It is unlikely that all this bad news which has been haunting markets will dissipate in the near-future either (Ware, 2010). The deleveraging of the banking system around the world has some way to go, and the impact of that on the global economy is likely to be negative for years to come. An economic recession is now likely to play out in most parts of the world. None of this is good for the fund management industry.
According to Barrett (2011) the current economic meltdown is not a market shakeout or a technological shift. It is the breakdown of an unsustainable economic paradigm (i.e. allowing the rich to become richer and the poor poorer) threatening the global sustainability of human society. The problems of existence have become global, while the systems and processes we have for dealing with them are national. There is clearly a need to move to a system of global governance.
Cabot-Alletzhauser (2011) explored what went wrong, not from the perspective of market mechanisms which have failed, but more from the perspective of the changes in human dynamics which unleashed a chain of unintended, but inevitable consequences. Two factors have been instrumental to making the sub-prime crises and subsequent financial meltdown distinctively different: the Internet and the changing social fabric vis-à-vis money and what these mean in our lives:

• The First Disaster of the Internet Age
• The speed and convenience of the Internet age is a double-edged sword: It has enveloped us in the consoling illusion that we all knew everything when we only knew a very small part of the whole. Unfortunately the information is disseminated in a million unconnected segments, leaving you, the unintended investor, with the task of connecting all the dots.
• Investors were bludgeoned into indifference by the data smog of free information. The behavioural finance specialists point out that when human beings are inundated with information, their immediate response is to shut down, reaching a state of paralysis. When forced out of immobility, their next immediate response is to simply do what everyone else is doing – creating a herd-mentality mindset to the tipping point of consensus-thinking which disrupts delicate market equilibrium and precipitates a stampede of fools.
• The Internet and other collateral instantaneous communication capabilities have ensured a total lack of accountability between the trading participants and the reality of their underlying clients. With instant-text messaging now the norm for conducting mega-million dollar transactions, it is little wonder that traders have begun to think of global trading as little more than a large-scale video-game. Just press the reset button when there is a slip up on execution or follow-through.

In summary, while the Internet has in many ways revolutionised the way in which we invest, the speed at which we can invest and the wealth of information at everyone‘s fingertips with regard to investing, it also contains the seeds of our own potential financial Armageddon. Clearly the challenge is to ensure a more effective means of filtering and aggregating information.

CHAPTER ONE: SCIENTIFIC ORIENTATION  TO THE RESEARCH
1.1 INTRODUCTION
1.2 BACKGROUND AND MOTIVATION
1.3 PROBLEM STATEMENT
1.4 OBJECTIVES
1.5 RESEARCH PARADIGMS
1.6 RESEARCH DESIGN
1.7 RESEARCH METHOD
1.8 CHAPTER LAY-OUT
1.9 CHAPTER SUMMARY
CHAPTER TWO: ASSET MANAGEMENT 
2.1 INTRODUCTION
2.2 THE ASSET MANAGEMENT INDUSTRY
2.3 CHALLENGES FACED BY THE ASSET  MANAGEMENT INDUSTRY
2.4 BEHAVIOURAL FINANCE
2.5 INDUSTRY MYTHS
2.6 COMPETENCE OF A FUND MANAGER
2.7 WHAT MAKES AN ASSET MANAGER SUCCESSFUL?
CHAPTER THREE:  THE SYSTEMS PSYCHODYNAMIC APPROACH
3.1 INTRODUCTION
3.2 WHAT IS SYSTEMS PSYCHODYNAMICS
3.3 THE CONCEPTUAL ORIGINS OF THE SYSTEMS  PSYCHODYNAMIC PERSPECTIVE
3.4 THE THEORY OF BASIC ASSUMPTIONS
3.5 THE ACIBART MODEL
3.6 SOCIAL SYSTEMS IN GROUPS AS A  DEFENCE AGAINST ANXIETY
3.7 SOCIAL DEFENCES AGAINST ORGANISATIONAL  LEARNING
3.8 SYSTEM DOMAIN DEFENCES
3.9 CHAPTER SUMMARY
CHAPTER FOUR: RESEARCH DESIGN 
4.1 INTRODUCTION
4.2 RESEARCH APPROACH
4.3 RESEARCH STRATEGY
4.4 RESEARCH METHOD
CHAPTER FIVE: RESEARCH FINDINGS 
5.1 INTRODUCTION
5.2 ANXIETY
5.3 CONFLICT
5.4 IDENTITY
5.5 BOUNDARY MANAGEMENT
5.7 ROLE
5.8 TASK
5.10 CHAPTER SUMMARY
CHAPTER SIX: CONCLUSIONS, LIMITATIONS  AND RECOMMENDATIONS
6.1 INTRODUCTION
6.2 CONCLUSIONS
6.3 REFLECTION ON RESEARCH ROLE
6.4 LIMITATIONS
6.5 RECOMMENDATIONS
6.6 CHAPTER SUMMARY
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