“We don’t want consensus,” says Stefan Dunatov, CIO of the UK’s £20 billion ($32 billion) Coal Pension, “it’s about sparking debate. New ideas. Not just trotting out a line. Too many people trot out lines.”
We are weaving our way through the construction that lines the streets outside Hermes Investment Management and the company’s owner, the BT Pension Scheme’s offices. The unseasonably warm weather, and lack of available road for taxis to drive upon, means we are walking back into London’s Square Mile and reflecting on the previous couple of hours.
“So, do you think you can get a story out of that?” he enquires. “We didn’t really talk about power…”
The “that” he is talking about is a lunch hosted by Chief Investment Officer for the 300 Club, a group of leading international asset managers, owners, and consultants. Dunatov was admitted into its ranks just after appearing in CIO’s Power 100 in 2013—no connection, I’m assured—and sits beside giant US investors including CalSTRS’ Chris Ailman and Wisconsin’s David Villa.
CIO had planned to take five of the 16-strong group to a swanky restaurant, but after advice (“Liz, they’ll just want to talk and exchange ideas”) and a glance at the available budget, we took Hermes up on its offer of in-house catering.
Hermes CEO and head of investment Saker Nusseibeh founded the group three years ago, and is as proud of it as he is keen to encourage its members to push the boundaries of conventional wisdom in investment management. In the room are players at the top of their game: the type who give keynote speeches at their competitors’ conferences. “Great,” I think. “Power should be oozing out of this one.”
After a sparkling water and chat about the “good old days of 1980s banking,” when a due diligence visit meant a two-day trip punting in Cambridge, we get down to business. These men—yes, they are all men today, but that story is for another time—are responsible for hundreds of billions of pounds, dollars, and euros, and are arguably among the most powerful in the business. But as we begin discussing power, the conversation slips.
“Fund management is an art, not a science, so you need a combination of skills and knowledge. And people don’t spend enough time thinking,” begins Nusseibeh. “Scientists will say: ‘I’m not sure, but I think,’ whereas a financier will say: ‘This is the way it is.’ It’s an extraordinary amount of arrogance.”
“There’s a marketing angle. The bravado of saying ‘I know this to be fact’- is quite a serious matter for fund managers,” says Alan Brown, former CIO of Schroders.
“But the flipside is, investors want that, too,” Dunatov—the investor—counters. “The problem is behavioral. People like to think they’ve been assured they’re going to get the upside.”
“Clients want to believe it’s a science rather than an art,” chimes in Zuhair Mohammed, partner at Aon Hewitt.
The starter, a trio of smoked fish, arrives, and the conversation turns to academic models—how they are mostly wrong, but why no one will admit it.
“There is the embarrassment factor,” says Brown, “but a lot of asset management is based on economic theory that is fundamentally flawed. Now graduates come into fund management and think these theories are unequivocally true.”
“This is what 300 is really about,” explains Nusseibeh. “It’s not a specific idea; it’s much more about wanting to collect enough senior CIOs to challenge and test ideas as there’s not enough of that being done.”
Ah—I think we’re getting to the nub of the Power Issue, and we’ve only just reached the main course.
“The market accepts the current reality, and if it changes we accept the new reality. In 300, we at least say: ‘This is the reality, but we will question it.’ It’s surprising how few senior people do this,” Nusseibeh continues. “And the reason is two-fold: Firstly, it is an uncomfortable thing to do, as it might negate everything you’re doing; and secondly, you don’t want to stand up and say something that would make him [pointing at Brown] snigger behind your back—”
“He wouldn’t do it behind your back!” roar the others.
“A ‘cover your arse syndrome’ goes on out there,” says Mohammed as an enormous ball of puff-pastry is placed in front of him. “That’s the difference between truly owning the asset and someone claiming to have the same interest as you. It permeates every link of the chain.”
(Art by JooHee Yoon)
“Alignment is the overarching problem—you can’t align asset owners to asset managers,” says Dunatov. “You have to be honest and say it. You have to work out what the second and third best solution is.”
“But it’s not just the asset owners and managers,” offers Lars Dijkstra, chairman of the group and CIO of Kempen Capital Management. “It’s also the regulators and everyone else in the chain who touches the flow.”
“Regulators are ruled by politicians who are on a three- to four-year cycle. Asset managers are on a three- to five-year cycle at best, as are consultants. The only people who are not are the asset owners, and there’s your misalignment,” says Nusseibeh.
“Even asset owners can be put on a short cycle,” pipes up Dunatov.
“This is something we looked at with the membership for the 300 Club,” explains Mohammed, the mound of pastry somewhat smaller now. “Plenty of people were interested in joining, but we thought for some it was more a marketing ploy than a genuine interest. People who want to make a difference and are willing, quite frankly, to put their career at risk for saying something different are the kind of folk we’re looking for, not those who’ll give their CV to 20 different associations to post on a website.”
On the conversation goes: Politics, immigration, remuneration, how it’s a good idea to seat your children in economy/coach while you travel in business on long-haul flights, and PIMCO’s succession plan of 12 months being in place around 20 years too late.
“So: power,” I say as the second cup of post-lunch coffee is served. “How can you Spartans overcome the vastly numerically superior Persians in the industry?”
“Influence can be powerful. Ideas we voiced three years ago have been adopted more widely,” says Nusseibeh. “The hero Leonidas never believed he could do anything—rather, if he made a stand, he believed others would realize the danger and act. I don’t think any of us are arrogant enough to believe that individually or even collectively we can change the system, but if we make a stand, the other Spartans and Greeks—the other CIOs and CEOs—will notice and make a difference.”
“So you’re saying we’re martyrs?” asks Dunatov, referencing Leonidas’ demise at the gates of Thermopylae. “I don’t remember that being in the club’s induction.”