Knowledge, hoarding and rent-seeking behaviour in the Anglo-American asset management industry

ABSTRACT

The institutional and organisational fabric of the global asset management industry is the focus of this paper. Using a stylised version of four models of management evident in the global asset management industry, it is argued that rather than sharing tacit knowledge within and between investment managers hoarding and rent-seeking dominate the industry. It is also suggested that geography matters: realising value in the investment management industry is mediated by institutional frameworks, regulatory-settings, and the incentives driving those who may claim rents on their ‘magic sauce’. The reach and significance of these propositions are illustrated by reference to the Canadian banking industry, its pension fund clients and their peers in New York and Toronto.

KEYWORDS:

• Global finance; tacit knowledge
• hoarding
• rent-seeking
• jurisdictional arbitrage
• North America

JEL:

• G11
• G24
• R51

ACKNOWLEDGEMENTS

The author is pleased to recognise the inspiration provided by Meric Gertler, collaboration with Ashby Monk and the team at Stanford University and ongoing dialogue with investment companies about their management of financial performance. The editors, three anonymous referees, Harold Bathelt, Michael Drew, and Dariusz Wójcik provided insightful and constructive comment on previous drafts of this paper. None of the above should be held responsible for the contents and/or arguments presented herein.

DISCLOSURE STATEMENT

The author's current responsibilities include membership of the investment committees of the Oxford Staff Pension Scheme and the endowment fund of St Edmund Hall, chair of the Ethics committee of IP Group (London) and advising and investing in FinTech start-ups. None of the above are sponsors of this paper or have a direct or material interest in its argument and content. No potential conflict of interest was reported by the author(s).

Notes

1 See Bathelt and Glückler (2013, Ch. 4) on knowledge-creation and management in firms with an extensive discussion about formal and tacit knowledge referencing key contributions of Gertler and Polanyi. They emphasise the contingent and relational aspects of knowledge – key elements of the model of knowledge management developed in this paper.

2 The term “magic sauce” represents the market-facing skills and expertise of investment managers given that competence is more than recognisable qualities and attributes. The phrase comes from interviews with market participants and suggests that an intuitive ‘feel for the market’ is often important in realising investment objectives (see also Barras et al., 2022).

3 Related contributions are found in economics, management and legal studies which emphasises asymmetric information, incomplete contracts and reliance (see Aghion & Tirole, 1997; Choi & Triantis, 2021; Hart, 1995).

4 The European banking industry and related asset management organisations are not considered in this paper. These finance organisations face significant challenges in making good on their global aspirations notwithstanding the relative success of Ireland and Luxembourg. See Clark (2016) and Wójcik et al. (2024).

5 Recent research on the evolving shape and performance of the global banking industry including reference to the experience of OECD countries since 1970 and including the impact of the global financial crisis can be found in Amel et al. (2004), Goddard et al. (2007) and Wheelock (2011).

6 This account is informed by Lo (2019) and assumes that markets are not self-governing trading regimes that converge time-and-again on a stable equilibrium. On the other hand, markets are relatively stable such that ‘pockets’ of disequilibrium are relatively rare and are associated with exogenous shocks (Farmer et al., 2023).

7 See https://www.sec.gov/news/press-release/2022-174 on the findings of the US Securities Exchange Commission and https://www.sec.gov/litigation/admin/2022/34-95928.pdf on the case brought against Deutsche Bank on the same issue.