The world’s largest asset owners should carry out a wholesale review of how they invest and take back control of their investment strategies from asset managers in order to promote long-term economic growth and financial markets stability, according to one of the City of London’s fund management grandees. In a withering attack on the asset management industry – which has so far escaped much criticism over the credit crisis – Paul Woolley, who founded the London arm of GMO, the US fund management group – said institutional asset owners had “unwittingly become complicit in the creation of a vast unstable monster of finance”, which he said had “cost them dearly”. Woolley is investing £4m of his personal fortune into the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics (LSE) and Toulouse University. His controversial research has already underpinned comments including the “socially useless” critique of some banking activities by Lord Turner, chairman of the Financial Services Authority. Woolley is also a former banker and IMF economist. In a recent presentation at LSE, titled: ‘A manifesto for giant funds: resolving the dysfunctionality of finance’, Woolley said giant asset owners, including sovereign wealth investors, large pension funds andfoundations had allowed themselves to be “deluded” by complex products put forward by asset managers. Many of these products, he said, were based on the increasingly discredited efficient markets hypothesis (EMH) that available information will bring prices back to fair value. Frequent boom and bust bubbles, said Woolley, had exploded the concept of EMH. Woolley said fund managers were today predominantly riding unstable market momentum rather than looking at fair company value, leading to excessive portfolio turnover and costs to asset owners. He said a ‘rent capture’ of the investment process meant that fund managers were profiting at the expense of investor interest. Investment managers, he said, showed little interest in growth and stability for investing assets: “It’s heads the manager wins, tails the client loses.” Woolley added: “Over the last 60 years pension funds have earned about 5% per annum after inflation. In the last ten years that has been 1.5% after inflation. Is it any wonder that companies are being hobbled by pension fund deficits!” Woolley said that the size of large asset owner portfolios mean they were effectively “custodians of social wealth”. Their large holdings of the global equities and bond markets, he said, meant they could implement policy changes that would bring private gains through improved returns and
public gains through more stable markets, faster economic growth and a less exploitative financial and banking sector. In a 10-point manifesto, Woolley said large asset owners should adopt a long-term investment approach based on future company dividend flows rather than short-term price changes, which he called a ‘tortoise vs hare approach’.He said annual turnover of investment portfolios should also be restricted to 30%, focusing investment agents on long-term investment. Hedge fund investment, he said, was also a mistake for asset owners because of over-egged correlation claims, excessive fees and a lack of transparency.
Listen to podcast of Paul Woolley presentation