Andreas Utermann, chief investment officer of $120bn (£75bn, €93bn) fund manager RCM, predicted in the spring that another large institution might fail in the wake of the collapse of Bear Stearns. “We cannot be sure that a further collapse of a major institution can be prevented,” Mr Utermann wrote in European Pensions & Investment News, a Financial Times publication.
In retrospect, he says he only thought there was “at most a 20 per cent chance” of this happening and appears a little sheepish to be associated with such a doom-laden prediction, however accurate it may have proved.
But the fact is, Mr Utermann is probably a lot more in tune with people outside the financial services industry, who are sceptical about utterances from its leading figures that recovery “is just around the corner”.
To listen to many financial analysts and fund managers, it is hard to believe the sector has suffered a huge blow that has destroyed the investment banking industry and probably signalled the end of the hedge fund industry as we know it. The jury is still out on the prospects for commercial banks and insurers.
While Mr Utermann is indubitably part of this industry, he is also an outsider. He believes financial services have become too influential and that a retrenchment is well overdue. “Financial services have played too big a role in the public mind. People have become too obsessed with their views – why should an analyst have more prominence in the media than a good oncologist, for instance?
“I think the financial services industry will change for the better in the wake of the last few months. There will be more emphasis on client outcome and less emphasis on the industry making money for itself.”
The changes will extend to asset management, where Mr Utermann predicts a shake-out of many kinds of investment styles and vehicles, including hedge funds, certificates, and, potentially, index funds. The last of these have been damaged by the goings on in the Dax index recently, he says, “where the indexers were forced to buy Volkswagon at ridiculous levels of valuation and sell the other constituents”, which was not in the interest of investors.
There will also be significant consolidation among long-only fund managers, he believes, as the capital requirement for firms increases and parent companies – mainly banks and insurers – realise that the days of 40 per cent returns on equity have gone. Many firms will be sold at knockdown prices: “It will be a buyer’s market for the foreseeable future,” Mr Utermann says. His views on financial services are considerably more radical than those who sit astride the industry.
But Mr Utermann is a product of the Mercury Asset Management school of investment, whose students were encouraged to behave differently to the herd.
Fund managers at MAM, the UK investment arm of SG Warburg (now subsumed into BlackRock via Merrill Lynch), were required to think creatively. “They wanted employees from diverse backgrounds, not the traditional Oxbridge/Sandhurst breed that dominated the City at the time and who all walked and acted in
the same way,” says Mr Utermann.
“The culture was not money driven at all. It was driven by a shared sense of doing great things and working in a great environment. In fact, money as a topic of conversation was frowned upon.”
Many investment professionals exited MAM after it was bought by Merrill Lynch in 1998, but their shared experience was so strong that a group of 70 or so still meet up for a dinner every year. And many, like Mr Utermann, have taken the lessons they learned and used them to good effect elsewhere.
Certainly, when Mr Utermann arrived at Allianz Global Investors-owned RCM in 2002, he had to use every acquired strategy at his disposal to pep up the underperforming fund manager. Most importantly, he created a strong stock-picking culture, setting up centres of excellence and encouraging deep research.
This echoed the “memo culture” at MAM, where employees from junior analysts upwards would share research with the whole firm and receive feedback on their ideas. “This meant there was no hierarchy. If your ideas weren’t good enough, you were out whoever you were,” says Mr Utermann. At RCM he discourages large group decisions, encouraging every investor to take full responsibility for decisions.
Perhaps his most radical move was to publish portfolio performance so everyone knew the investment returns of everyone else. At a stroke, he removed the incentive for people to spend a great part of their time selling themselves to superiors in a bid to position themselves for larger bonuses.
“They would be wasting their time doing that now – their performance is out there for all to see,” says Mr Utermann.
The unconventional approach to investment has reaped dividends. When Mr Utermann stepped into his role, just 20 per cent of RCM funds were outperforming their benchmarks over a three-year rolling period. He demanded an improvement to 70 per cent and currently 82 per cent of institutional assets and 71 per cent of total assets are outperforming their benchmark.
The question, of course, is whether RCM can continue outperforming.
After all, stock-picking is tough when widely used metrics such as price-earnings ratios are as unreliable as they are today.
The best prediction on markets Mr Utermann can offer is that “in three years, stocks will be higher than they are today”.
Yet, even if RCM’s future performance turns out to be poor, it won’t be because it followed the herd over the cliff edge. Mr Utermann’s management style ensures this.
It is neatly encapsulated in the words of Stephen Zimmerman, his former boss at MAM, who took him on as a graduate trainee in 1988,
telling him: “Promise me this, Andreas. Always tell me things I don’t want to hear.”
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