Q&A with Jon 'JB' Beckett, veteran fund selector and strategist and author of a New Fund Order, Chief Investment Officer to Gemini Investment Management, UK Research Lead for the Association of Professional Fund Investors, Chartered Member, Author and Senior Reviewer with the Chartered Institute for Securities and Investments, FMYA panel judge, and Ambassador for the Transparency Task Force.
Q: You currently maintain at least 4 noteworthy professional roles in the asset management industry. What’s behind that extraordinary level of activity?
A: I’ve been in the industry for nearly 20 years, been made redundant twice and have had to fight for everything. I was not earmarked for easy success: wrong school, wrong degree, wrong location, wrong background and wrong mindset. To succeed I had to do more than most, working 7 days a week, evenings and weekends, work more, travel more, write more.
It may sound a bit pious, but I want to make a difference and leave a positive mark on the industry. Obviously, it’s also to advance my career. But my industry roles give me a sense of perspective; and working with a range of companies, industry groups and entrepreneurs gives me a broader outlook and a career path that’s beyond self interest.
I believe in horizontal working networks. I’ve never climbed the corporate ladder very well and so no longer try. That doesn’t mean I’m not ambitious; but I reject the regimented notion of ‘success’ being based on the number of people under you and your salary. Today, I have no reports and I’m glad of that. Yet I know many C-level executives on a first name basis and am asked regularly to offer input and join (non-paying) advisory boards. My career strategy is based on playing the long game, building credibility, adding value, creating a network, helping others and then (hopefully) the opportunities will come to you. I started buying funds at 27. Now at 42 I think more seriously about finances, but I have NO sense of entitlement; just high work rate and good intentions.
Q: You’ve been called the “Turbulent Priest.” What’s meant by that?
A: I often say and write the wrong thing; or perhaps the right thing but at the wrong time and, whichever it is, some will believe I am betraying the sanctity of the fund selector. Outing taboo subjects others would prefer remain hidden. While I may be known and hopefully respected in fund circles; I have no doubts that many will frankly find me a bemusement and a nuisance to the status quo. An ex-colleague came up with the “Turbulent Priest” label for me when I started to write my white papers. As a Catholic and someone overly fixated with films like the Da Vinci Code, I liked the ‘holy hitman’ connotation. The ill-fated Thomas De Becket was the original ‘turbulent priest’ so it’s both a name play and a fair portrayal of my contrarian nature. I just hope I don’t end up the same bloody way!
Q: Any specific guidance on “best and worst practices” for boutique fund managers looking to gain the interest of allocators?
A: There are lots of things boutique managers do really well, and in many ways better, than large houses. The alignment transparency between manager and investor is clearer. Notably, the message tends to be purer and less perverted by marketing or product teams. Remember the competition for the email inbox is crazy. It’s overloading fund buyers and some material simply looks contrived, reactive and forced. Less is always more! My main advice is stay true to how you run the fund; for example, avoid macro if you are bottom-up, know the basics of your trading model and risk management. Be transparent. Have a clear view of what investor type the fund suits, and over what investment horizon. Understand the game theory among fund buyers and how core-satellite investing approaches can quickly reduce available assets for boutiques. Finally, if you can’t afford the best in distribution, then reach out and engage introducers and marketing partners. This is a scalable cost that will be more than offset, and they will bring you much needed assets.
Q: You appear to be no fan of very large funds, which you call supertankers. What are the unintended consequences of these funds?
A: I’m very cynical about how capacity is managed by fund managers today. Fund size has become a commodity, which accelerated due to RDR and fee compression. As fund managers were less able to ‘sweat’ their book of assets, that turned funds like GARS, PIMCO Total Return and M&G Optimal Income into super-feeders to subsidise entire fund businesses. I saw this trend back in 2007, but no one listened to my ravings about cyclical ‘redemption risk.’ When I first wrote my “supertanker funds” paper, the whole industry still celebrated ‘blockbuster funds’ as the winners of the Annual Management Charge model – from which shareholders, sales and portfolio managers all benefit. I posed the point that size brings liquidity, resource, cost, regulatory and redemption risks to the fund manager (and investor).
Our very notion of size has become skewed, with all boats floating as the market has grown. I know houses with 100+ desks, and while the dilution of alpha and high operating costs simply encourage funds to get bigger, performance more often than not diminishes. This is logical as the ‘big is best’ model worked in OTC and quote-driven markets, but less so in order-driven markets. Where liquidity becomes shallow, then the supertanker funds become price takers when investor redemptions are called. The analogy works well with similar issues that face large ships. It’s still quite anecdotal and based on a small number of examples; we still need more liquidity transparency to better understand price ‘yaw’ arising from dark liquid pools. It’s asset specific but we now know markets also correlate during liquidity events. Nonetheless I don’t feel all fund buyers fully appreciate or plan for size risk.
Q: Can you share any insight into your informal research seeking empirical evidence on whether active fund manager selection actually benefits investors?
A: My research suggests that confusion prevails, which is not surprising. Like many fund buyers, I’m barraged by populist media, obtuse aggregated studies and biased fund house responses on issues like ETFs, active versus passive (SPIVA), boutiques, asset concentration, fees and digitalization. Often the loudest bellowers have no working experience, or rely purely on statistics, and the problem is that the nuances and details are lost. It’s as if neither side can afford nor entertain grey areas, and the debate becomes far too partisan. I am pro-change, because our industry needs it, and I question the motives of those who attack change outright. I find it more insightful to share experiences with fund buyers.
The reality is that active and passive funds are here to stay. Fees will fall, but not simply because of regulation, which is a poor driver of change; but rather because technological change allows it. Professional fund buyers have responded, showing great awareness of the issues in our industry and an openness to change. This includes the ETF evolution into active strategies, better use of Fintech and better use of boutiques to reduce asset concentration. Indications are that professional fund buyers operate at a far more advanced level than most advisers, are less receptive to a ‘star manager culture,’ and are able to generate better value from fund selection. Selecting efficiently is key, hand-in-hand with good due diligence.
Q: Your book, “New Fund Order,” predicts some very significant shifts in the asset management industry’s value chain. What’s in store for fund managers over the next 5 years?
A: The asset management industry has ducked technological change over the last 5 years. This is not my epiphany; there are plenty of good books that cover the exponential rise in technology and impact on the workforce. Deep-learning algorithms, ETFs and block-chain trading are clear disrupters.
We talk a lot about Robots that have completely changed the assembly line. Digitalization of all white collar roles is universal, and the closer a role is to a set of rules or formulas (such as actuarial science), the more likely that role will become obsolete. Desk-based roles are on the firing line. My expectation is that the fund management industry, in terms of people, will need to be reduced by around 20%. And those who remain will become cyborgs, using Fintech effectively, and demonstrating their economic value over and above the technology. This is not adjusting for the current industry peaking, the result of a short-term migration from Investment Banking and Sell-side research.
Q: Your view is that Fintech will significantly disrupt the industry, and you call for all segments to engage in a “digital think tank.”
A: Industry disruption is unlikely to come from the largest groups where ‘Digital’ has become a marketing and brand weapon. The largest firms will use it to leverage their economies of scale, not make the industry fairer. Meaningful change will evolve from the bottom-up. Small Fintech companies will innovate, then be acquired, and their technology will be adopted. There is a significant opportunity for smaller boutiques that are not encumbered by decades of outdated IT, high operating costs, high people costs and legacy customer books. There is opportunity for boutiques to become hybrids with Fintech partners. Meanwhile, best practices will be driven by private think tanks like Z/Yen, Fintech Circle and industry groups like The Transparency Task Force…and the APFI of course. This is the future. This will be the most significant issue for fund buyers in the next decade.
Q: Can you explain the concept behind your Third Party Marketer/Crowd Funding concept?
A: As both a CIO for a boutique platform and as an institutional buyer for a large insurer, I know first hand the difficulties for large buyers adding small funds. The problem arises from the size of the ‘ticket.’ You simply end up dominating the fund, which in listed funds becomes a ‘controlling share’ issue since you also control the shares of the fund umbrella. A transparent approach to syndication with clear pricing, controlled by the boutique via a third party marketer, and membership, would allow institutional buyers to invest, secure in the knowledge of collective due diligence, fair pricing and no holding concentration. In turn, this would avoid any inference to a cartel, and also springboards the boutique’s AUM. This approach is related to the hedge fund seeding model, but the investing is at the fund level, rather than firm level, and as a result, the return on capital and management model is different.
Q: The Association of Professional Fund Investors, for which you serve as research lead, seeks to “isolate funds and their managers that have sustainable investment merit.” In practical terms, how does APFI work to achieve that goal?
A: The APFI is run by fund buyers for fund buyers, and fund selection is the provence of our members. The organization seeks to share best practices between professional fund investors. That concept of professionalism is important, because we see fund buying as a discipline that spans a broad range of approaches, but should conform to market standards. Much like the balance of our members, the APFI supports active fund management but recognizes that deviation from an index means the potential for better and worse outcomes. Arguably, there are too many underperforming managers (cyclically-adjusted) after fees. Encouraging best practice that separates the good from the mediocre is a key APFI goal. One example of this is standardization of the due diligence questionnaire.
Q: You’re a fan of classic cars. As an asset class, will British marques such as Triumph, MG and Austin Healey ever be matched, in terms of excitement and connection with the road?
A: I once owned a 1972 Triumph GT6, which looked and sounded great, but handled terribly. I bought it for GBP3k and sold it for GBP3500 after racing it around a race circuit before handing the new owner the keys. It smelt of fuel, was quite slow even after tuning and couldn’t stop in a straight line, but I loved it. It had wood and vinyl seats and looked great but creaked underneath.
Triumph’s manufacturer, British Leyland, is a good example of a people-intensive industry that failed to keep up with the rate of change. The company went from market leader in the 1960s to a sick company by the 1980s, as a result of complacency and asset concentration. Austin, Triumph and MG were each respected brands, suddenly under one management. In reality, these cars were good, but not as good as most people think, and certainly not by 1970s standards.
Bureaucracy, rising costs and inefficiency hurt the classic British marques, but lack of innovation is what killed them. Post-war Germany and Japan made a better product at better cost. Nostalgia is interesting, its commodity value is not unlike trust, it exists but it’s hard to quantify. This is the same challenge for the financial industry: quantifying the product all along the value chain.
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