Fund Manager Staff Changes

Every now and then within the funds management industry there seems to be a staff merry go round with key people being “head hunted” by competing funds management companies. There will always be the comment from the firm losing what was regarded as their key person fund manager, that we have procedures documented in place, and that it will be business as usual. Having owned our own business in the industry for some fifteen years now, we are rather sceptical of such comments.

Funds management organisations do not have multitudes of analysts and fund managers. Investors and advisers alike may be surprised as to how few key personnel there actually are. The procedure manuals will have guidelines as to maximum exposures to any stock or bond. There will also invariably be procedures as to how a portfolio is constructed. What is not documented is all about flair and passion, and almost a sixth sense about what might happen in different market situations. This is what really differentiates how good an individual manager is, and how well he or she relates to each other within their small teams.

Within our advisory business, we have a preference for using fund managers who are active, and who use investment mandates whereby they do not have to be fully invested at all times. We do not expect our managers to be market timers. History shows that it is virtually impossible to time the “market”. If the fundamentals for a stock do not stack up, then it should simply not be either bought or held within a portfolio. One of the keys is not to buy over valued stocks or bonds. The returns are much better if you buy an undervalued stock or bond and trade out of it when the price has risen to the point whereby it is fully valued.

This week has seen what fund manager owners must dread. The key personnel of one well respected fund manager have left en masse to join their former colleague who has established a rival funds management business. Within 24 hours, funds management research house “Morningstar” had issued an “Avoid” notice on the two funds that were affected. We would expect that there will be major outflows from one fund manager to the new manager.

History shows that key employees often leave large fund managers to set up boutique funds management businesses. Some of these businesses grow considerably. One of the best examples is when Kerr Neilsen left BT Funds Management and set up Platinum Funds Management in Australia. This was in the so called halcyon days when BT Funds was well known and highly regarded, and well before the company was sold to several different financial institutions in relatively quick succession. Platinum now manages well in excess of $18 billion dollars, with a surprising large percentage coming from New Zealand investors. A New Zealand example is Paul Glass who left BT Funds and set up Brook Asset Management which was subsequently sold to Macquarie in 2007. He has started another funds management business called Devon Funds Management.

There are few barriers to entry to becoming a fund manager. Obviously you need to attract a good level of funds flow to provide a satisfactory revenue stream from which to build the business. It would not be surprising if Devon does not attract significant funds flow, and becomes well known as a specialist Australasian funds manager as they have attracted a number of highly regarded and skilled experienced operators from within the industry.