In the face of an ever-increasing wave of issues surrounding culture within funds management businesses leading asset consultancy, Frontier, has put its foot down in terms of our approach to assessing culture within the businesses managing the funds of our clients.
We have always assessed and considered culture within the context of developing our manager ratings and recommendations. However, significant manager events over recent years have prompted us to amplify the processes and weighting around the assessment of culture as a component of suitability for investors.
Director of Sector Research, Paul Newfield notes has been escalating its focus on culture over a number of years and is set to introduce higher hurdles for managers to clear. “As part of our research and due diligence process we are now making explicit statements and assessments of traits we are seeking from managers in the area of corporate culture. And, when issues do arise, or even signs of concern, we have developed an internal framework to help us fully explore those cases,” said Paul.
“Unfortunately, we have had to test some managers via that framework already. This has enabled us to rigorously assess key areas where less tangible but critical cultural issues, which are not easily quantifiable, arise. We have already applied this framework to a number of cases where concerns have arisen and in some cases we’ve re-rated managers, some down sharply, when they have come up short of our expectations and for them that will mean a loss of funds either from existing clients re-allocating or potential investors choosing not to allocate in the first instance.”
Frontier’s set of culture principles outline the key traits expected from managers seeking their recommendation and the more than 1,200 managers we already research from around the globe. The traits reflect treatment of clients, in terms of transparency around communication and action following an adverse event; treatment of the manager’s staff, including evidence of diversity, inclusion and equality; reflection on and rectification of issues that arise; and a lack of any patterns of systemic behavioural and cultural issues.
Frontier believes quality funds management organisations will have nothing to fear from the scrutiny around these standards. “People should not underestimate the need to properly examine the existence of these traits and the work needed to assess these factors. These traits sit on top of, and are conducive to, the ability of the manager to deliver desired return outcomes. A failure here is likely indicative of imminent failure across other more quantifiable parts of their business,” said Paul.
Frontier’s dedicated Investment Governance Team is completing a comprehensive research exercise examining culture more deeply, why it is important and how asset owners and advisers ought to embed culture and its assessment into manager research. The resultant paper due to be published next month and titled “What lurks in the shadows?” will be a must read for all institutional investors.