The Danger of Noise in the System

So, what noise can be dangerous in the asset management industry, you might ask?

Surprisingly it’s not the classically blamed “perpetual chatter of the global newsfeeds” and “know-it-all” market commentators, or even overly enthusiastic office colleagues playing catch in the corridors, and it’s most certainly not the rubbish bin collectors clattering outside in the street, or your recently WFH neighbour trimming his hedge with a buzz-saw precisely when you’re deep in thought about the merits of an investment case.

No, it’s much more like the high-frequency noise only bats or dogs would hear – it’s present - but not audible to most of us, and thus only presents itself as an outcome or event.

This is the noise of politics and the darker arts of EQ – of political manoeuvring, nepotism obsequious flattery and other shenanigans to gain favour, remain in favour and to maintain alignment with the “king-makers” and befriend the “ax-men”.

So where and how does this dangerous noise typically present itself?

Dangerous noise can manifest anywhere in the investment industry but in my view, is most notably evident in those asset management firms owned and controlled by other, larger entities, classically banks and life companies, who may not be (usually are not) centrally aligned to their subordinate, because the operate with different ownership structures, stakeholder demands, business-cycle expectations and time-horizons that are misaligned.

For example, the biggest “movers and shakers” and shouters in the banks are the investment bankers, who all hustle to pitch their latest Ivy League business school plan to “revitalise and fix”, once and for all, that little asset management entity “they control”.

The problem is, is that investment banking is all about short-term fixes and pitches (I’m sure you know the lipstick on a pig analogy…), and nothing like long-term business and investment cycles where philosophies and processes can be dislocated from current favour for prolonged and painful periods that are best managed and controlled by owner-managers who have personal “skin-in-the-game” and the temperament and fortitude to stick to their guns and maintain their philosophy and process.

It’s usually at points of maximum stress that the dangers of “noise in the system” become manifest and visible.

That long under-performing portfolio manager or CIO who gets “discretely asked” to exit quietly, or other key members of investment decision-making bodies or even key distribution personnel with key client relationships, who get “leaned-on” and leave – these are the precursors to a heightened elevation of dangerous noise in the system.

Investment management requires strong discipline and a high degree of focus – on investment only matters. Stability of the business leadership and investment decision-makers, and importantly, even on their various supporting structures and personnel is paramount. Tinkering with one or more of these variables is akin to taking a size 12 screwdriver to a precision-engineered Swiss watch.

No good can come from investment personnel being distracted by “noise in the system”,  figuring out where they now “fit” in the new hierarchy, whether they’re “in favour” or “out-of-favour” with the new boss, or needing to brush up their CV’s, liaise with head-hunters or making contact with their industry network to create a “reserve position”.

Covid19 has been a catalyst to create a lot of “dangerous noise” in the asset management system.

Are you paying attention and listening very carefully…?

Your ears need to be sharp right now.

This article is directed primarily at asset allocators, consultants, IFAs and end-user clients (Pension Boards, Family Offices etc) in the investment management system, who need to be aware of the dangers presented by “noise in the system” substantially created by politics.