The Towers Watson-sponsored Thinking Ahead Institute, launched last year and currently supported by 30 fiduciary investors and fund management groups, has completed a draft of its first research paper, ambitiously entitled ‘The State of the Industry’. When the final version is published to the industry as a whole this year, it is likely to make many participants feel at least a little uncomfortable.
Tim Hodgson, the co-founder, with Roger Urwin, of Towers Watson’s Thinking Ahead Group (TAG) in 2002, embarked on his latest and biggest-ever project last year, through the creation of the Thinking Ahead Institute (TAI), which opened up the research program to the whole industry.
The TAI allows the TAG to become a more collaborative effort with managers and fiduciaries, such as super funds, and also defray its costs. Towers Watson has committed a minimum of US$1 million a year to the TAI and the members top this up. TAI, however, is a not-for-profit unit within Towers Watson with a transparent P&L for members, at least. Towers Watson does not reveal the members’ names nor what they paid for their membership. Hodgson did say, last week, however, that Towers Watson would be spending double its minimum commitment on TAI this year.
Like the title of its first research paper, the TAI itself is a very ambitious project. It aims to change the course of the whole funds management industry to the benefit of the “savers”. A basic assumption, supported by the consensus from the first meeting of members to discuss the inaugural paper, held in Sydney last week, is that there are too many agents taking too much money out of the system.
The Sydney meeting, on March 11, followed the distribution to members of a draft of the ‘State of the Industry’. The 24 members from Australia and overseas who attended had a “fantastic debate”, Hodgson said. “It was an astoundingly high-quality discussion. This is a way that we can give the members value, too. They get to see and shape the research.”
The consensus, according to Hodgson, was in line with what the members have signed up for. The funds management industry has too many leakages. There are too many fund managers taking too much out of the system for too-little added value. To fix this will, inevitably, mean a change to the industry’s incentives structure.
Hodgson admits many people will be uncomfortable with the TAI’s work. “Why, as a turkey, would I vote for Christmas?” he says.
The ‘State of the Industry’ in its current confidential-to-members form is a 20,000-word document split into three chapters. When it is released to the world in the northern summer or autumn this year, it may be cut down to a more digestible format.
The draft report is a benchmarking piece which allows the development of an ongoing scorecard across 12 criteria, such as alignment of costs and efficiency. Potentially controversially, the members have also been asked to rank, on a score of one to nine (where nine is the highest) a range of views such as the level of trust of the industry by savers and the state of regulation.
“How do you think the industry will respond to the question on the level of trust [afforded it]?” Hodgson asks. Hmm. My guess, for what it’s worth, is not very well assuming the respondents are honest. The results have not yet been collated.
“They are sensible criteria,” Hodgson says. “At least we will know which areas come out better than others and this will suggest our priorities and future actions.” The draft paper assumes that the investment industry is a complex adaptive system and therefore unable to be subject to what academics refer to as “reductionism”, because there is no linkage between the individual components of the system and the behaviour of the whole. One gets the impression the final report is not going to be light bedtime reading.
There are five over-arching issues, Hodgson says. They are:
. The rise of complexity: the clock-speed of change is going up. To borrow an acronym from the US military there is volatility, uncertainty, complexity and ambiguity (VUCA). TAI proposes some “coping” strategies.
. The probability of another financial crisis within the next 10 years. “We don’t think the system has been made much safer” since the GFC, Hodgson says. “We suggest some pre-emptive actions.”
. What happens to pension property rights? This is mainly a defined benefits fund issue to do with the probability of default by a government or major corporation. “The issue is whether this will be small and contained or whether there will be contagion… perhaps resulting in loss of trust in the defined contribution world.”
. Where to capitalism? The rise of universal ownership, whereby the historical pre-eminence of “market fundamentalism” is being replaced by a modified form whereby society gives governments a licence to regulate certain areas. It is more like “inclusive capitalism”.
. The evolution of an industry scorecard. Will any score that is generated by the TAI members likely represent what is the reality in 10 years time?
Moving from the present state to the future, the TAI has suggested 20 “future states”, which will look at and analyse aspects of the industry on the basis of trends and possible scenarios.
For instance, are there any implications for the industry as a whole from the decisions last year by two of the world’s largest fiduciaries, CalPERS of the US and the PGGM in Europe, to ditch their hedge funds programs? For each of the 20 “future states” three scenarios will be presented and then discussed and voted upon by the TAI members.
Each of the 30 non-Towers Watson members of the TAI are able to nominate 10 individuals to participate in the research program, which will make the results reasonably representative of the industry, although probably skewed to large funds and global fund managers.
Whatever the results, they will at least be a wake-up call for many of us.
Greg Bright is publisher of Investor Strategy News (Australia)