Active asset managers are failing to take advantage of superior information to outperform the market, a recent study has found.
According to Stanford University’s Ashby Monk and Dutch pension plan APG’s CIO Eduard van Gelderen, most asset managers lack the skill to create, organize, use, and exploit information and adjust investments accordingly—or, in other words, manage knowledge.
“A skillful asset manager maintains and creates superior knowledge and knows how to apply that knowledge effectively,” the paper said. “Most don’t even use publicly available knowledge effectively, often relying on the tacit knowledge of an individual investor who is not willing to share his or her knowledge.”
The authors surveyed US and Netherlands-based managers as well as large firms—including JP Morgan, State Street Global Advisors, BlackRock, PIMCO, Blackstone, and KKR—and found most were “largely indifferent” to managing knowledge.
“A skillful asset manager maintains and creates superior knowledge and knows how to apply that knowledge effectively.”The majority of the surveyed managers said they understood the importance of superior knowledge, the paper said, but the sentiment was “rarely translated into proactive knowledge management policies or resources being allocated deliberately.”
Only hedge funds emphasized having “unparalleled data” at the core of their business.
In addition, quant managers failed to acknowledge the value of knowledge earned through experience, the study found, while other managers reported only their “star performers” had specific skills to draw connections between rare events and asset pricing.
Some asset managers even believed knowledge management was not the responsibility of an investment board or a CIO. Many reported certain barriers to knowledge transfers including a lack of incentives, particularly in compensation.
In order to better take advantage of knowledge through skill, Monk and van Gelderen suggested the CIO develop investment beliefs that are specific, well-documented, and readily available to the entire organization.
These beliefs should then be made an important part of the firm’s investment culture—“the firm’s pride of ownership”—the authors said.
The CIO could quickly assess how these investment beliefs would be translated into detailed strategies, the paper said, and how they would generate alpha
It is also important to measure the skills of individual managers at the firm and play to their strengths, ensuring they are matched with the strategies and investments in which they are most knowledgeable.
Data, technology, risk analytics, and the right portfolio construction tools should be used to support these managers, the authors added.
Read the full paper “Knowledge Management in Asset Management”.
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