Plunging the depths
Colin Kay has been known to get in over his head but not in the way one might think. As the global head of performance consultancy at HSBC UK, Kay must always be in control. The long-time performance analyst has reached his goals by working hard, knowing the industry inside out, and constantly tackling the challenges of performance measurement head on. He is well respected within the industry and a voice practitioners turn to for advice and mentoring — likely the reason he has kept his team mostly intact for years now.
However, when he is not studying investment strategy, or trying to solve the ills in the performance measurement field, Kay likes to escape by going scuba diving. His penchant for exploring the deep blue waters around the world is a passion that can only be rivalled by his passion for the performance arm of investment banking. The famous underwater French explorer Jacques Cousteau once said: “When one man, for whatever reason, has an opportunity to lead an extraordinary life, he has no right to keep it to himself.” Kay has decided to take this great man’s advice by sharing his thoughts with PMR.
Can you give a bit of history on yourself. How did you get to this point in your career and what is your background?
I left school at 17 and joined the Royal Bank of Scotland as a general clerk. I took the first part of the Institute of Bankers’ Diploma examination then asked for a more interesting role than counting money and cashing cheques. They said: “Sorry, you’re too young.” That put me off them a bit and I started looking around for something else and eventually joined one of their clients, Wood Mackenzie in 1980. Wood Mackenzie was a stockbroker that had begun to use spare computer capacity to provide portfolio analytics. It would eventually become what is now known as WM Company.
When I joined them, by pure chance, they put me into a team that was about to deliver a new product measuring the performance of US pension funds’ international investments. There were just three of us when we started off, but by 1994 I was a director and responsible for all the overseas business, 70 staff and clients in 30 countries. It was pure luck that I was in the right place at the right time. I have no formal performance qualifications, it just came naturally I guess.
Do you think most people in performance measurement got into the field by luck, like you did, and do you see this as an pattern for the industry?
Historically, I think it has been. It is much more structured now but if you look back to the 1980s there was not a large body of people with performance skills. There were relatively few people that knew how to do it, so if you wanted performance people you had to train them from scratch.
Tell us about some of the significant changes that you have seen since you began in this industry?
The main thing has to be the complexity. If you go back to 1980 it was all balanced pension funds comparing themselves against their peers. It then evolved to be driven by market indices and customised benchmarks, and now it has moved again so you have got very complex structures using very complex strategies and instruments. The result is a need for more detailed and flexible reporting produced to a much faster timescale.
What advice would you have for young professionals trying to enter a career in performance measurement?
The first key thing would be: don’t be fooled or frightened by all the complex mathematics. Things like the Journal of Performance Measurement often publish papers that highlight very complex analytics and models. However, often the accompanying examples are based on very simple data sets, and in real life the data is never really as simple or as clean as that. I can imagine many people concentrating on the mathematical parts, but they either overlook or don’t fully understand the challenge or importance of getting proper clean data.
Some would consider performance measurement as a bit of a black art because there is a preoccupation with the mathematical approach and not enough practical application of the principles. Do you agree or disagree with this statement?
I would agree with that 100 per cent. What you can see within the development of GIPS is that it has been driven mainly by performance measurement people. An example would be the first attempt at leverage and derivatives provisions. They were intellectually and mathematically elegant but totally impractical to implement. When you think about it, GIPS is all about delivering a fund manager’s message to potential investors. If one recognises that, it is very odd there aren’t more fund managers’ marketing people that are actually involved in driving GIPS. The problem with performance measurement people is that not many of them are actually out in the market selling investment services and speaking to investors.
Would you say there is a lack of good people moving into performance measurement?
If you look at some of the moves that go on, it seems to be the same people moving from one head of performance role to another. I think there’s a fairly small pool at the top of the performance industry. Delve below that and our fund manager clients are saying it’s very, very difficult to get performance analysts. What we do in our business is take staff who have been through our graduate recruitment programme, train them in performance, and put them on a career path that can lead to a senior consultant role dealing with senior individuals at pension funds and fund managers.
You have been part of a panel discussing whether outsourcing can be a more effective solution. What are your thoughts on this subject?
From a performance perspective, the jury is out. There have been some high profile deals and some of them do not appear to have worked out tremendously well. I think the biggest difficulty is dealing with ad hoc and special requests from the front office and sales/marketing. These are often business critical but you cannot simply say to an outsourced provider ‘I need this now and I need this level of detail and I want it within the next 30 minutes’ because everything is tied in to service level agreements.
What do you see as the hottest topics within performance measurement?
I think GIPS is definitely a hot topic at the moment because of the mandatory verification issue. Mandatory verification is not going to go ahead in 2010 and whether it will ever go ahead is still open to debate. Generally on GIPS, I think we have come a long way and it has been beneficial. But, it is becoming more and more complicated at the same time as they are trying to get less sophisticated markets on board.
With this in mind, do you think that asset managers will continue to seek verification in the future?
There are some that are starting to question GIPS. It depends on each individual market’s view of the importance of compliance and verification. In the UK, it is regarded as good business practice but if you are not compliant, it doesn’t mean you won’t get on the consultant’s buy list. The other issue on GIPS is just a general lack of awareness among investors about what GIPS is and why it is a good idea.
Software and the lack of credible vendors always seem to come up in this field. What are your thoughts on the state of software, or the lack thereof, in the performance measurement arena?
I would agree there are few credible vendors. If you do an Internet search for performance measurement software providers, there are a lot of names but then when you actually look at what some of them have, there is not a lot of choice.
When you are reading the financial section in the newspaper, what articles generally keep your attention?
I guess I would be looking at pension funds that are changing structure or undergoing a period of change because if they are introducing new asset classes, new managers or new strategies it could be a good opportunity to give them a call and let them know they should also be considering their performance arrangements.
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