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19 December 2011

FN: Asset management - a bigger economic role will mean more scrutiny

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The asset managers are set to challenge investment banks as the financial backers of the global economy. The drawback is that they'll come under more scrutiny than they have experienced before.

The only people who really assess asset managers at the moment are investors, and their consultants. Asset managers raise money by suggesting, subtly or otherwise, that they will make money for their clients. Anyone who trusts a particular asset manager with their capital will check that an interesting return is, indeed, being made.

Interpreting results, however, is difficult. If an asset manager has underperformed against the market or its rivals, that could indicate a lack of skill. But it could also indicate a run of bad luck that is about to turn. Investors are forever dropping asset managers just before they outperform. The records show that the worse an asset manager’s recent performance, the greater the chance of it getting better. Good client relations staff have been able to use this fact to retain institutional investors through some really difficult times.

The only other guide to how we should appraise asset managers is investor satisfaction. For the asset management industry as a whole, therefore, it is regrettable that a dispute between an asset manager and 23 of its institutional clients has just entered the law courts, with investors suing Henderson Group over its management of an infrastructure secondary fund.

For as long as a disagreement is handled in private, there is a chance of a reconciliation. The law, however, is designed to produce a winner and a loser. Whatever the outcome of this legal dispute, trust in the asset management industry will be damaged.

Full article (FN subscription required)

© Financial News

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