A peek into the investor’s mind

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Corporate governance, mutual funds and capital structure may not pique everyone’s interest but the topics bring a sparkle to the eyes of Henri Servaes.

The finance professor thrives in a world that remains a closed book to many. His mantra is relevance. “I tell students to be very careful picking a topic [for research] that is hot. It can change very quickly. A research topic has to be interesting to you, you have to feel you are making a contribution to the field, to investors, helping them in the decision process.

“There are still many puzzles out there that executives want to see addressed....and your research must help executives and investors to make better decisions.”

Prof Servaes is well placed to do so. At 39 years old, with an impressive clutch of publications, teaching awards and honours for financial papers under his belt, Prof Servaes was the youngest professor to hold the chair of finance at London Business School; he became a full professor at LBS aged 32.

Although committed to his subject, this was not always the case. As a young man he did degrees in business administration and information systems at the European University, followed by a masters in industrial administration, and then a PhD in finance at Purdue University, Indiana. before opting for a PhD in finance at Purdue.

“A lot of what you end up doing depends on the professors you meet. I had excellent finance professors.” The die was cast.

Belgian by birth, it was only when Prof Servaes went to the US, which he believes was, at that time at least, far more research-
orientated than his home native country, that he realised what an academic career could encompass.

“In Belgium, you spend a lot more time in the classroom. There is nothing wrong with that but you need a balance.”

Today his life is professional life is divided between teaching and research. Of topical interest is his work on investment management and the decision-making process of fund management companies – why do they such companies start so many new funds and how along which dimensions do they compete: by price or product type, for example?

“It is more about how these companies organise themselves, rather than . . . trying to understand the development of the fund management industry worldwide,” he comments. “Why is it so successful in some countries, but not others?”Prof Servaes points out that investors pay some$100bn (£55.4bn) a year in fees for investment management, but there is a wide variation in costs vary widely from country to country. Why is this the case he asks? He cites a variety of possible reasons: poor regulation, variations in disclosure, bigger funds or even that investors are unaware of fee variations.

His research, he hopes, will ultimately help fund managers, investors and regulators.

“Maybe fees are different because of the countries’ economies, but maybe fees are high for good economic reasons. It is very important to have informed scholarship. We need to make sure we understand the economies of the fund management industries – a lot of what we can do in finance research is help regulators make better decisions.”

There has been little research on how fund management companies organise themselves or the cross country comparison of fees he says. He hopes that this research will open new avenues.

Apart from a spell of
military service with the Belgian Air Force as his military service obligation, Prof Servaes has spent little time outside academia. However, he was persuaded to take a leave of absence from LBS for a 10-month stint at Deutsche Bank in 2000/2001. He had no full-time working experience and was keen to see life from the other side of the fence.

He describes the period asinteresting and a great learning opportunity. The learning curve in industry is very steep, initially he adds. and he has drawn on the experience since returning to academia.

While he firmly believes academics do not need practical experience from the workplace – “your students will supply that” – nevertheless he feels that having spent time in industry himself, he can be more authoritative about how decisions are made. “You don’t need to have it [work experience] but you then know your own ­limitations.”

Lest anyone think Prof Servaes is firmly ensconced in his ivory tower, a considerable amount of his time is given to teaching. “Part of what you do is educating people. You have to enjoy
it because it is an important element of the game and
you can get a lot of satisfaction from knowing it went well.”

Moreover, he says, the experience students bring to the classroom as well as their feedback helps both teaching and research. “It is a way of conveying the work you have done and testing your thoughts.”

The life of an academic suits him, he says. “I think it is a great profession . . . it went a lot better than I thought when I started it. I am very happy.” However, he says, it is not a profession of instant gratification. Research can be slow and painstaking and often lonely. But, when one succeeds, the satisfaction is tremendous. “If you are truly a researcher, much of the fun lies in the process of discovery and having a good class,” he comments

There remain many seams to be mined. Decision-making inside a company, for example, such as how an investment decision is made, is in some sense still in its infancy, he says.

“While we know what the rules are, do companies
follow these rules?” And how much influence do personal elements have in the decision-making process, he asks.

“There are a lot of decisions that companies make that are wrong. Hopefully we can shed some light on these so that boards and investors can bring it to the attention of companies.”

Prof Servaes would appear to have plenty of material at his finger tips for years to come.

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