Saker Nusseibeh: from hippy to Hermes CEO
A Palestinian with a doctorate in medieval history from the University of London: Saker Nusseibeh, chief executive of Hermes Fund Managers, delights in being an outsider. A child of the 1960s too, he preaches about the need for trust in the fund industry and the importance of the common good as if he were the folk singer Joan Baez.
Indeed, it is his hippie ethos, his contrarian nature as well as his training in academia that pushes him to correct the failings of the business he has worked in since he started as a graduate trainee with Mercury Asset Management in 1987.
So keen was Mr Nusseibeh to clean up the fund sector after the financial crisis hit in 2007 that two years ago he set up the 300 Club, a group of senior industry participants that includes Alan Brown, Schroders’ former chief investment officer, and Bob Maynard, chief investment officer at the Public Employee Retirement System of Idaho, to raise “uncomfortable” questions about their business.
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“The group is just aiming to do something for public service,” he says. “We don’t all agree on a common ideology, but we all agree that we need to make the market better.”
The members of the club – named after the 300 Spartans who held off the Persians in the battle of Thermopylae – think the industry has become unnecessarily complicated and would benefit from a spring clean.
“We’re building more and more products and making it more and more complicated; often charging more fees in the process,” says Mr Nusseibeh. “But actually, it’s pretty simple. Your client puts his money away for a bit and the investment provides a cash flow and you pay it to him. You have to be the steward of their assets.”
But fund managers must find their voice, according to Mr Nusseibeh. He argues that they do not speak up and take a stand for fear of offending bosses or regulators. “People get worried about career risk,” he says. “If you’re a fund manager, do you really want to stand up and say part of the problem is the regulator?”
In his view, whistleblowers should have relayed their concerns about the dangers of credit default swaps before the market meltdown, which began after the collapse of Lehman Brothers, the Wall Street bank.
“Because fund managers’ entire business is analysing markets, they should have, could have, and probably did see what was happening. And then, for one reason or another, they decided not to say anything,” Mr Nusseibeh sighs. “They decided not to say anything, not because they are bad people, but because the system is structured in such a way that they are not incentivised to speak out on wider issues.”
Asked to name the industry’s flaws, Mr Nusseibeh responds by rattling off a list. He says: “There’s a kind of belief that complex is better and I’m not sure that’s true.
“One of the things that I feel strongly about is that people in our business use complex language to make something sound almost mystique-like and difficult to penetrate. My favourite is left-tail risk; what the hell does that mean?”
His rapid-fire criticism continues: “There’s also a belief that volatility equals risk and I’m not sure that is true,” he adds. He finishes his diatribe with a critique of the industry’s reliance on financial models: “If models really worked, why is it that they don’t make as much money as you think?”
The crux of the problem, he says, is that fund houses are selling investors’ funds “which are barely active” under the guise of pitching them as “smart beta” and charging high fees for the privilege of doing so.
Since his salad days at Mercury, Mr Nusseibeh argues that fund managers have gone from looking after clients to “just selling products” and “something has been lost in that”.
Mr Nusseibeh makes the case that skill is rare in the fund management business. So investors should know that it is near impossible to end up with a high number of skilled managers with expertise in a particular area.
“I’m a great believer that there is alpha. Of course there is and there actually is proof of this,” he says. “But there isn’t enough alpha to run the entire industry. That’s just nonsense.”
Since Hermes is owned by a pension scheme, Mr Nusseibeh says the company has the advantage of seeing the world more from the perspective of the buyer than the seller.
In keeping with his theory that the larger the fund is, the more difficult it becomes to run, Hermes is structured as a collection of small teams dedicated to areas ranging from inflation-linked bonds and Japanese equities, to real estate and private equity.
The company’s aggregate performance has been strong, with three-quarters of its investment strategies outperforming their respective benchmarks in both the last three years and in the first quarter.
Given that it runs so much money for pension schemes, Hermes faces its share of challenges, given low-interest rates and a spate of regulations such as Solvency II that are forcing groups to throw more money into debt assets.
And Mr Nusseibeh speaks critically of the mark-to-market accounting requirements, which pension funds face every three years.
“I don’t understand how marking to market every three years is good for very long-term investment,” he says.
Pension funds should alter their approach in a few critical ways, he says. First, given the amount of government debt washing around in markets, the idea that it is risk free has to be reassessed.
“If Spanish debt is not risk free, then you have to argue that all government debt is not risk free,” he notes. “And if it’s not risk free, then why is government debt still considered the least risky asset base when matching liabilities?”
His second point is that pension funds should take on the role of the activist investor more frequently and put pressure on companies to create change.
He also boldly predicts that rising interest rates, if and when they come, will offer the most help to pension schemes looking to match their assets with their liabilities.
Moving on from pension funds, Mr Nusseibeh, who has lived in the UK since his parents sent him from Jerusalem to school at Eton, dwells on his place as an outsider. He argues that immigrants do well in business because they gain from their perspective.
“Why is it that Goldman Sachs, Salomon Brothers and Lehman Brothers were such amazing success stories? Because these Jewish guys were newcomers on Wall Street,” he remarks.
“We have to introduce a sense of personal responsibility in my business,” he concludes “That’s what the industry has lost.”
Source: www.ft.com