Risky investment stars behind global crash, says expert

Carol Geremia said getting culture right was one of the hardest aspects as an investment manager.

Having a culture where star talent was allowed to make investment decisions without being checked was a big driver of the global financial crisis, says a top executive at a global asset management company.

Carol Geremia, co-head of global distribution for Boston headquartered MFS Investment Management, was in Auckland yesterday to talk to its New Zealand clients about the difference between cult and culture.

Geremia said getting culture right was one of the hardest aspects as an investment manager. Part of the problem is managing what she calls the "Red X" phenomenon.

"Our business is a talent business. "Red X people are seen as very smart and very creative. But they are also risky, they can burn culture to the ground or drive up the risk."

Geremia said Red X people were common in the asset management industry but few firms managed to integrate them well into a team.

"Only 9 per cent of firms fix the problem, a further 9 per cent fire them." Geremia believes a lot of global financial crises can be pinned on Red Xs who were never managed properly.

"When they have a Red X on their hands a greedy firm will ride them as long as they can because they are making money.

"They ignore all the warning signs that might point to the problem."

Like Leonardo DiCaprio's character in the Wolf of Wall Street they can wreak havoc by convincing investors to buy into something.

She also blames the industry's focus on rewarding short-term results and the ongoing drive to create new products to meet investor demand.

"A lot of asset managers will put in their brochure that they are long-term investors but the pay structure does not support that.

"This is where investors got burned - the pressure of profits and asset gathering dominated decisions." Before the financial crisis was also a time when many asset managers chose to create new investment products driven by investor demand for higher returns.

"The biggest problem was that most did not know how to do that without taking on more risk."

They also failed to warn clients about the extra risk.

Geremia said it was human nature to think "I want to be special".

"Greed, hope and fear raises its ugly head no matter what type of investor you are."

But, she said, the lesson was that there was no quick way to get rich.