Fitch Ratings says results from its survey of European asset management 'front office' investment processes confirm that one size does not fit all in investment management. Fitch recently surveyed 30 distinct investment processes involving EUR1.8trn of assets under management to identify whether firms adhered to 'best practices' as outlined in our rating criteria for asset managers and funds. The survey covered:
-Staffing and organisation, including functional presence/role of a Chief Investment Officer (CIO) -Research resources and degree of specialisation/formalisation -Investment decision-making processes -Portfolio management and monitoring
In terms of optimal size, 'best practice' means achieving the optimal fit between the task at hand - meeting (risk-adjusted) performance targets - and the resources available. This will vary by asset class and strategy, among others, as was confirmed by survey findings. Resources alone are insufficient: a rigorous investment process plays an equally important role.
Most surveyed firms have a CIO or functional equivalent; in the majority of cases (53%) the role is more strategic in nature, as opposed to hands-on investment decisions (36%) and portfolio management (11%). Fitch views a second layer oversight on investment research and decision-making, typically by a CIO, as an investment management 'best practice'.
Two-thirds of surveyed managers have dedicated research teams and three quarters have dedicated trading desks. The level of assets under management (AUM) is the determining factor, as virtually all companies with more than EUR100bn of AUM have these dedicated functions. On the other hand, smaller managers or those that oversee simpler instruments and asset classes are less likely to have dedicated analysts/traders. Fitch's criteria emphasise the presence of dedicated and distinct investment resources (research and trading) as a best practice.
In Fitch's sample, broader teams are most often seen in strategies involving a large investment universe covering various markets and asset classes. Conversely, more concentrated and highly focused teams are mostly seen in specialised managers. Achieving an appropriate balance between specialisation staff and flexibility is a best practice.
Another best practice is to have a variable compensation scheme for key investment decision-makers based on quantifiable objectives that are aligned with investors' interests. In only half of the sample, analysts' compensation is a function of a fund's performance, whereas it is, at least partially, for more than 90% of portfolio managers.
Seventy per cent of surveyed asset managers produce full proprietary research. The remaining 30% rely on a combination of proprietary, internal research and external third-party research. Fitch considers consistently documented and communicated analytical opinions and recommendations best practice.
Fitch considers an investment committee or comparable mechanism a best practice because of the discipline it imposes. This is the case for slightly more than half of Fitch's samples.
At more than half of the managers in Fitch's sample, performance attribution analysis and risk management reports are provided to the front-office at least on a monthly basis. Frequent and formalised monitoring process, distinct from decision-making with proper and independent oversight, constitutes best practice.
The special report, 'Front Office' Best Practices in Investment Management', published 18 September 2014, is available on www.fitchratings.com
Link to Fitch Ratings' Report:'Front Office' Best Practices in Investment Management
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