Incentive Drives Behaviour
Investors can pick up a newspaper and, on the same day, sometimes on the same page, read a bullish and then a bearish forecast.
It could be that investment managers and market strategists look at different attributes and draw differing conclusions from the same data. For example a micro (bottom-up) manager might have one view (regarding an individual stock, say) while a macro (top-down) manager might have another view (based on an economic theme and it’s impact on an individual stock, say).
The point is that the views are often not just different but divergent.
How does an Individual Investor select between the two brands of investment management?
One wonders if the difference might be the source of the view. Independent (manager-owned) investment manager forecasts tend to be more sober. When the forecast comes from an investment manager that is tied to an investment bank, however, the view tends to show less restraint. (There is ‘career risk’ at an investment bank for those with a bearish view).
This makes intuitive sense at the most basic level. Incentive drives behaviour.
Independent investment managers, as owners, have their own money invested in the firm. They likely manage their own money in-house. And owner-mangers don’t want to lose their own money. (Duh)! Client assets ‘are’ the business and thus are protected and preserved with a prudent view and risk management approach … ‘as if’ the assets were the managers’ own.
But some investment managers owned by an investment bank might be paid for driving revenue. And performance drives revenue … not risk management.
Indeed, manager-ownership is one of the manager selection criteria Institutional investors consider.Next time? What is a global stock? Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan