Chains of Finance and how they matter

October 26, 2017

Guest blogpost by Ekaterina Svetlova, Diane-Laure Arjaliès and Philip Grant

Book by Diane-Laure Arjaliès, Philip Grant, Iain Hardie, Donald MacKenzie and Ekaterina Svetlova (2017), Chains of Finance: How Investment Management is Shaped, Oxford: Oxford University Press,

We may be entering ‘the age of asset management’, suggested the Bank of England’s Director of Financial Stability (now Chief Economist), Andrew Haldane, in an April 2014 speech. Investment management firms control assets equivalent in value to around a year of total global economic output—ca. $100 trillion. Yet the media and academic attention has been focused far more on banking or various types of ‘traders’ than on the investment management industry – despite the large impact of the latter on the economy and society more broadly.

Chains of Finance – How Investment Management is Shaped, published at the Oxford University Press, aims to address this gap. The book explores the inner workings of the industry, shedding light on the known but above all the unknown of investment management practices. The key message of the book is simple: The investment management industry is better understood as a chain of multiple intermediaries linking savers to the companies and governments that issue financial instruments, rather than as an addition of professional groups tied to a specific set of expertise, such as fund managers, securities analysts, and investment consultants. The investment industry today has actually little to do with individual savers choosing which shares or bonds to buy directly. Rather, most of their money flows through the investment chain, an often extensive sequence of interdependent go-betweens.

For example, savers’ decisions are frequently guided by financial advisers and ‘wealth managers’; they may also be influenced in their choices of mutual funds by specialist firms such as Morningstar and Standard & Poor’s that award these funds ratings. Furthermore, most ‘savings’ in fact take the form of contributions to workplace pension funds. These funds, with some variations across jurisdictions, usually have trustees responsible for investing the assets, an activity which they generally delegate to investment managers. Trustees’ decisions about which investment management firms to use are often guided by investment consultants. Following the chain in a different direction, fund managers (and traders in their firms acting on their behalf) need to choose where to execute their orders to buy or sell shares or bonds, and these decisions are strongly affected by fund managers’ relationships with brokers or dealers, in particular to those who work for big investment banks.

Chains of Finance explores how the intermediaries of the investment chain shape each other’s practices, channel the flows of savers’ money, and ultimately form audiences for each other’s performances of financially competent or expert selves. This performance of expertise is all the more important in an industry where performance is everywhere measured by putatively objective numbers, and where it is statistically almost impossible for an investment manager to consistently deliver above market returns—and yet where firms continue to charge clients substantial fees and individual fund managers are generally well remunerated. This generates a situation where links in the chain act as critical observers of others with whom they are linked—consultants and trustees critically observing and measuring fund managers, for example—and at the same time need these same others—trustees generally feel legally obliged to delegate investment management functions to professional firms, and consultants need managers for their own profession to exist.

We thus picture the investment chain as a series of relations that both constrain and enable. We show that investment managers’ decisions cannot properly be understood by focusing simply on a fund manager’s beliefs about particular securities or markets, but are co-shaped by clients, brokers, investment consultants, securities analysts, and even unions and politicians.

Importantly, the arguments and case studies presented in the book are built on ethnographic and auto-ethnographic work in the investment industry spanning several years in four cities (Paris, Zurich, Frankfurt, London) and 451 in-depth interviews with investment management industry employees in those locations as well as Edinburgh, New York, and other places in the US and Canada. Our ethnographic field research allows us to provide a thorough analysis of the asset management industry from a social science perspective and brings insights that could not be obtained by a purely theoretical work.

For example, one part of our study focuses on attempts by a number of links in the chain to pressure the US subsidiary of a French automotive manufacturer to recognize unions at its plants and improve working conditions there. In unprecedented meetings, fund managers, pension fund trustees, representatives of different French unions, French politicians, and US workers came together to try to work out a way to use a shareholding in the car company to bring about meaningful change in line with responsible investment objectives. What ensued, however, was a demonstration of the difficulty of moving the chain due to the constraints intermediaries impose on each other through their relationships. The fund managers would only act on instructions from the clients; the clients, as represented by the pension fund trustees, did not want to do anything that might contradict their legal duties; the politicians were unsure whether they could bring about pressure on an American subsidiary; the unions were focused on getting the best deal for French workers.

In another chapter we show how the investment management division of a Frankfurt bank formed a new ‘quant’ team. Reacting to the external expectations set by clients, investment consultants and competitors, the division’s managers decided they need a new, quantitative, ‘rigorous’, ‘scientific’ approach alongside their existing ‘fundamental’ method. In other words, the establishment of this quantitative department was driven by marketing, precisely because it could help to present the fund managers’ work as more rigorous and scientific. Clients such as pension funds, and the investment consultants who advise them, want to hear about rigour and ‘process’, a theme we came across time and time again in our research.

Elsewhere in the book we demonstrate that the client–fund manager relationship is not a simple principal–agent problem, but a multi-faceted, contextually dependent, malleable matter. Institutional investor clients such as pension funds have the power to set the terms of investment to constrain fund managers. Simultaneously, fund managers can also reshape what their clients imagine their interests to be, influencing their clients to align their goals with those of the managers. Moreover, relationships between clients and fund managers (and also brokers/traders and fund managers) are often characterized by reciprocity, loyalty and even amity, not by control and punishment.

Our analysis of an investment chain comes at a time when the view of financial markets as networks is influential. We do not see this as a rival theory. The chain is, however, a way of thinking about financial markets that helps make clearer the character of the various interactions. The concept of the investment chain also allows a complementary approach to the question of where influence resides within finance. The book shows that power lies in the chain and its multiple influences on investment decisions. Last, the book shows that the chain matters to outcomes in financial markets. These include a range of issues with broad societal consequences. Despite the investment chain’s importance, and its ubiquity in official reports across a variety of concerns with financial market operations, the chain is rarely the subject of explicit academic enquiry. It is even less often the subject of public debate. If a poorly functioning investment chain contributes to lower growth, inequality, poor workers’ rights, and a hotter planet, its functioning should be a matter of urgent academic and political enquiry. This book is a first step towards this direction, one we hope more researchers and practitioners will follow.



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