There’s been plenty said and written about fund manager pay in the UK this week, after the announcement by two prominent City stock pickers that, in future, they won’t be paying bonuses, either to themselves or their staff. So, is this move by Neil Woodford and Daniel Godfrey to be welcomed?
I’ll admit I’m in two minds. Of course, we pay fund managers to outperform the index. Over the long term, hardly any do. Why should we pay them extra, in years where they do outperform, for simply doing their job?
The important question for me is this: Do bonuses improve investor outcomes? The evidence suggests that performance-related bonuses in asset management, and indeed in business generally, do not, in most cases, lead to better results. There is also evidence that bonuses in fact encourage the wrong sort of behaviours.
One of most the damaging unintended consequences of performance-related pay from an investor’s standpoint is short-termism. Say, for example, a manager has performed well in the first six months of the year. Inevitably there’s a strong temptation for that manager to secure their end-of-year bonus by “playing it safe” in the second half of the year, and staying close to the index.
It works the other way as well. A manager whose first-half returns have been disappointing has no option but to take more risk over the next six months in order to earn a bonus. In both cases, the fund manager is incentivised to act in a way that is not in the customer’s interests.
But the bigger picture here is that fund managers are already staggeringly well paid for the work they do. In 2013 and 2014, for example, bond fund manager Richard Woolnough was paid a (frankly obscene) £32 million by M&G.
Most of us wouldn’t begrudge them superstar salaries if fund managers really did add significant value; but the evidence shows that, in aggregate, they actually extract value from the investment process. Only around 1% of funds outperform over the long term and, to quote the authors of a study by the Pensions Institute, the “vast majority” of UK fund managers are “genuinely unskilled”.
That’s why, despite my dislike of the City’s bonus culture, I actually think there is an argument for linking fund manager remuneration — and the fees that investors pay — even more closely to how they perform. The fee model at Orbis Access, for example, is especially interesting.
Whether or not other fund houses follow Woodford and Godfrey’s lead and put a stop to bonuses, it’s time to restore some sanity to fund manager pay. Regulators surely have a part to play, and so too journalists. But ultimately it’s up to consumers to demand a better deal and, where necessary, take their custom elsewhere. Remember, it’s your retirement you’re looking to fund, not your fund manager’s next Ferrari.
Related posts:
Why should fund managers earn more than accountants?
Why excessive pay for fund managers affects us all
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
