Kay Review currently undergoing intense scrutiny at Parliament

The Kay Review is currently undergoing a series of detailed examinations by the Business, Innovation and Skills Committee in the UK Parliament. Some of the leading names in institutional investment have been put under the microscope by MPs.

First to come before the committee was Professor Kay himself, on February 5. He said: “We need to enable trustees to feel that, not only are they not required to monitor the performance of their asset managers every three months, but that they are actually not serving their members very well if they do so.

“We need to tell pension fund trustees that the real approach they ought to be taking is finding managers whom they trust and in whose strategies they have confidence.” Funds needed to facilitate their asset managers’ dialogue with companies.

And he said a market has been created for investment consultants “who are themselves the source of quite a lot of this short-termist behaviour, because they are typically making recommendations to trustees based on recent performance histories, rather than the future approach and strategy of the manager”.

Next to appear before MPs was Lord Myners, the former City minister, a week or so later. He was highly critical of the review, saying: “The Professor fails to come up with many practical proposals beyond wishful thinking.” Myners called the report at times “contradictory” and “irrelevant” – and “lacking in penetrating analysis or strong recommendations”. The former Gartmore and Marks & Spencer head said: “I think, sir, that we ultimately have a report where the reviewer and the Secretary of State have both been nobbled by existing interests.”

On Kay’s idea, supported by the government, for an investor forum, Myners said he expected it to be dominated by trade associations seeking to “protect the status quo.”

The current model of investment works well for agents, Myners said, adding: “What we need here is a more fundamental review by asset owners regarding whether this model works.”

Former GMO partner Paul Woolley, who now heads his own centre studying ‘capital market dysfunctionality’, gave evidence at the end of February. He was asked if Kay responded to the challenge of market short-termism: “No. We have been worrying about the issue of short-termism essentially for 40 years.“We have never addressed the problem properly, because we have not got to the key issue. .. you need a new analysis and a new framework for understanding finance. Without that, you will never get anywhere.”

Governance for Owners partner Simon Wong, in the same session, told MPs: “You see that people who are managing these large pools of money are being outmanoeuvred by their agents purely because they do not have the sophistication to understand what they have purchased and what they have been told. … The lack of knowledge contributes to the expanding chain of intermediation.”

Also appearing before MPs was the Global Chief Investment Officer of Fidelity Worldwide, Dominic Rossi. He said: “If you ask an academic to produce a report it is going to be an academic report.” And he “completely distanced” himself from Kay “when he wraps the stewardship issue up in a Union Jack. I do not think it is a matter of nationality. I think it is a matter of attitude.”

Roger Gray of USS, the Universities Superannuation Scheme, was pithy about the challenges of investors engaging with companies: “A definition of hell would probably involve all fund managers being hyperactive with all company boards and management. We all must look to be effective rather than encumbering the companies we invest in or, indeed, snarling up all our resources.”
It was important, Gray said, for funds to select their fund managers well “and incorporate what they are expecting in terms of corporate governance behaviours within [their] mandates”.
And he said USS has been “relatively unsuccessful” in engaging fund managers over their long-term incentive arrangements. “Particularly in the hedge fund domain, where we thought some humble pie would have been consumed sufficiently to shift that dial, it has been an almost hopeless exercise.”
Neil Woodford, star fund manager at Invesco Perpetual doubted how useful the investor forum would be – likening it to “herding cats”. Chris Hitchen, the chief executive of Railpen – and a member of the Kay panel – told the Committee last week that Lord Myners could be the right person to make the investor panel a reality. Daniel Godfrey, CEO of the Investment Management Association (IMA), said the forum idea would “move forward or be killed quite quickly”. Link