Valuation As Science and Art in Asset Management

In the paper, I would like to develop an understanding of valuation that is related to the idea of the investment chain which my colleagues and I started to map in our recent book (Arjaliès et al., 2017). The positioning of investment managers in the investment chain and particularly the links to other market players such as clients and consultants determine how asset managers value assets. Even if some professional investors share Peter Lynch’s view that “investing in stocks is an art, not a science”, they might still exactly comply with the quantitative rules of valuation because they are exposed to the “gaze” of consultants and clients.

My analysis will be based on two sets of interviews. The first set contains thirty semi-structured, in-depth interviews with German and Swiss mutual fund managers. The second set of interviews with institutional investors and consultants is still work in progress. However, what is already emerging from my preliminary analysis of data is that the two groups have different conceptions of valuation. Mutual fund managers operate at a distance to their clients (there is usually no direct contact) and as a result often – and openly – include qualitative criteria such as a brand or the management’s ability to innovate in their valuation procedures. The asset managers, who work for institutional clients regularly meet their clients, report to them and are constantly observed by consultants, suppress qualitative criteria in their valuation techniques and rather develop transparent investment processes and comply with them. Thus, differences in valuation can be observed not only across the asset classes (e.g. equities vs. bonds) but also among the investor groups depending on their position in the investment chain. By analysing these issues, the paper will highlight one important but still not widely discussed social aspect of valuation practices.