The financial crisis and scan-dals such as Bernie Madoff have led to a greater desire for transparency not only of charges but also in what and where a fund is invested.
Family offices strive to alleviate heightened client concerns but not only does greater transparency create administrative burdens and added cost, it can also undermine the very service they offer.
Michael Maslinski, director of con-sultants Maslinski & Co Ltd noted: “Clients can end up with information overload, which can often do more to confuse than to clarify. If you go to the doctors you want their advice. Some of us like to research an ailment on the internet to help us ask the right questions, but there is a limit to the amount of time and effort we want to spend on self-diagnosis. If we over-load clients with information they could also start to wonder that if they have to do so much work themselves, why are they paying you?”
Maslinski points out the main reason greater transparency is needed in the first place is because of the lost trust resulting from the trouble financial institutions, like banks, have wrought. It could be argued that if the financial services industry were perceived as trustworthy, trans-parency wouldn’t be such an issue. Tasked with financial promotion and creating new and interesting products that have appeal, there will always be companies that push sales and nnova-tion too far or strive to hide charges in complex material.
“As Anthony Hilton wrote in the Standard not too long ago - in the old days it used to be there were a few dishonest individuals in an honest company; now it is a few honest people in dishonest institutions,” Maslinski commented.
On the fund manager side of the equation, being fully transparent has its own difficulties. Vincenzo Galli-Zugaro, managing partner at alternative asset management com-pany Seven Pillars, is a firm believer in transparency. However, he also noted that for managers of certain investment strategies it may lead to complications and could even hinder performance.
A hinderance
Since the financial crisis many funds, particularly those of a smaller size or from boutiques where distribution may be an issue, are turning to platforms to miti-gate the higher costs they face from increased regulation.
In such a competitive space, such services are promoting their advantages by proclaiming greater and greater transparency. Some even allow investors to see the underlying holdings of funds with minimal time delays. This, Galli-Zugaro argued, may be fine for a typical long/short equity portfolio but for a manager who takes large, active stakes in a company it could be problematic.
He cited the example of a manager who does just that, obtaining a large enough stake in a listed company that they can then sit on the board and affect change. If that manager was to reveal the companies in which he was building a stake then not only could he face greater competition from other investors, but the share price could move away from him, making it more difficult to follow the very strategy that attracted investors in the first place.
Conversely, if an underperforming manager who is forced to meet redemptions through sales of their positions reveals the fund’s holdings in a very timely fashion, other inves-tors could look to exit those compa-nies themselves, causing prices to dip even further. “Even the SEC rec-ognises there is a need for some dis-cretion with investments so there are delays before a 13F has to be filed, broadcasting a manager’s holding in a company,” he noted.
For large funds such transparency pressure may not be as great as they have the flexibility to forgo platforms or can enable managed accounts on their own. However, smaller funds pushed onto platforms requiring a high degree of look-through in the name of transparency may have little choice, Galli-Zugaro noted.
Another issue portfolio look-throughs can create is stress on cli-ents. How many investors would appreciate if their adviser called them every other day to relate the value of their portfolio? With almost daily information on a fund’s holdings, it can amount to the same thing - too much information.
“It can create problems when you elevate transparency at all costs. Most family offices and investors want greater transparency but they have to understand the cost it is coming at. There has to be an ele-ment of trust and investors need to give managers the ability to recluse them from some information.”
Like Maslinski, Galli-Zugaro believes trust is the answer but how do we go about re-establishing trust in an era of scandal and financial crisis? To Maslinski the answer is simple, be honest. He admits this may be easier for newer or smaller firms than larger institutions where the culture of seeing clients as tar-gets may be stronger. “Everyone is tarred with the same brush as the big banks so all investment firms have to work harder than they did even 20 years ago to cultivate trust. We need to distinguish the compe-tent from the incompetent not just the honest from the dishonest.”
Multi-family offices are often stuck in the middle ground of this debate on transparency. Their cli-ents want to know more and they in turn require more information from managers while at the same time they run the risk of turning off clients and managers with such demands. However, in some ways it is also easier as MFOs are predi-cated on strong client relation-ships with a foundation of trust. “Yes, a degree of excessive trans-parency is probably needed in this industry right now but the more you are trusted, the less information is demanded.”
