by Noriyuki Morimoto
In the investment management business, it is the client who selects an investment strategy, and investment managers compete with their investment skills within the chosen strategy. This can be comparable to the restaurant business, where the customer makes a choice of cuisine, such as Japanese or Italian, and chefs compete for taste in the field of specialty chosen by the customer. This is a seemingly decent analogy, but there is a change of subject.
First, investment outcomes are quantitative, so performance can be ranked across investment strategies, whereas differences in taste in different types of cuisine are qualitative and cannot be compared in terms of which is superior or inferior.
Second, while the taste of food is defined by the skill of the cook, independent of the customer’s choice of the type of cuisine, investment performance is basically defined by the customer’s choice of investment strategy, to which the skill of the investment manager adds only a small contribution.
Is it not strange that in the investment management business, the majority of results is dictated by the non-professional client, and the professional investment manager makes only a minor contribution?
Culinary techniques can also be evaluated by their achievement against a defined number of indicators, such as nutritional value. This is the skill of a nutritionist, but like the skill of a chef, it can vary greatly, because for humans a meal is not only about nutrition, but also about fulfilling the unique cultural requirements to enjoy the meal. In fact, some hospital and school lunches managed by nutritionists taste good, while others do not.
Should not the investment management business be likened to the work of a nutritionist? Just as the skill of the nutritionist is to achieve a scientific combination of nutrients while meeting a minimum requirement in taste, the skill of investment may be in achieving the investment objectives of the client while meeting baseline requirements in investment results.
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.