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The activity of institutional fund management has several facets e.g. employment of professional fund managers , research (e.g. of individual assets and asset classes ), dealing, settlement, marketing, internal audit , the preparation of reports for clients. The largest financial fund managers, or institutions, are complex financial firms with all the complexity that their size demands. Apart from the people who bring in the money (marketing) and the people who invest it (the fund managers), there are compliance staff (to ensure that no laws or financial market regulations are broken), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to control the institutions own money and costs),computer experts, and the "back office" (the people who track and record transactions and fund valuations for sometimes literally hundreds or thousands of clients per institution).
Key problems include:
The most successful investment firms in the world have probably been those that have been separated physically and psychologically from banks and insurance companies. That is, the best performance and also the most dynamic business strategies (in this field) have generally come from independent investment management firms.
Institutions control huge shareholdings. In most cases they are acting as agents (intermediaries between owners of the shares and the companies owned) rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies they own...via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary outvote them at annual and other meetings.
In practice the ultimate owners of shares often do not exercise the power they collectively hold (e.g. because the owners are many and diverse each with small holdings), and the financial institutions (as agents) may or may not choose to do so. There is a general belief that shareholders, by which is often meant the institutions acting as agents, could and should exercise more active influence over the companies they hold shares in (e.g. to hold managements to account and to ensure that Boards function effectively). This would mean that there would be another effective pressure group (additional to the regulators and the Board) overseeing management.
Some institutions have been more vocal and more active in pursuing such matters than others. Some institutions have believed that there were investment advantages to building up substantial minority shareholdings (e.g. 10% or more) and then bringing pressure on managements to change the way firms were run. Another widespread tactic is for institutions to effectively collude to force management change. Perhaps more widespread is the sustained pressure that large institutions can bring to bear by talk and persuasion as they liaise with managements over time.
The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure managements. In Japan it is traditional for shareholders to be low in the 'pecking order' and for managements and work forces to some extent to operate as mini-clubs able to ignore the rights of the ultimate owners. In Japan we may say that there is more of a stakeholder mentality where it is felt appropriate to seek consensus amongst all interested parties against the background of strong unions and labour legislation.
If a client is to have confidence in an investment manager, then there have to be reasons why the manager is going to produce above average results. These reasons tend be found in the 3-P's of philosophy, process and people.
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