Asset managers pay themselves big bonuses

Now we learn that bonus payments distort the way that active managers trade stocks.

Anton Lines ‘ recent paper draws this conclusion from a manager of managers

“The paper suggests that active managers are putting their own interests ahead of their clients, which is a clear conflict of interest. They are also adding to the volatility of the market by attempting to hug the benchmark.”

Reading the paper makes me realise why their was such a failure among diversified growth funds at the time of the 2008 crash to smooth volatility.

The paper should frighten anyone who is holding active equity funds as part of a drawdown policy. The message is empirical and clear,  most active managers get paid bonuses which reward creating risk rather than managing  risks.

Asset managers reduce active shares as volatility increases (source Anton Lines)

At times of trial active managers, because they are paid to do this, actually increase market volatility through herding.

As active managers herd towards the index, they create greater concentrations of risk, distort the market and lose their clients money in so doing.

Herding is caused by bonus culture  (which encourages herding) and the bonus culture then hits punters with a second sucker punch – in active fees.

Asset trading or asset management?

Meanwhile, those managers not trying to outperform are trying to reform. Here’s Sacha Sadan at LGIM telling shareholders that (via fund managers) they have the power to stop the executive pay arms race.

Asset managers cannot have it both ways. They cannot be the cream of the executive pay crop, and be putting the boot into executive pay. They cannot claim to be the fiduciaries of our money and then pay themselves bonuses for screwing up the market.

These reports are not just coming out of the rent a gob blog-a-sphere, they are the meat and two veg of FTfm reporting. Go onto the FT website and you can surf articles all morning repeating the same message. Fund managers are shamelessly practicing what their corporate governance departments preach against.

The conflict of being a commercial fiduciary

Once again , I am called to question a system that rewards performance over governance, stock trading over stock management and prioritises the interests of the fund management house over that of the customer.

My favourite comment on this comes from Lee Higgins who runs an asset management recruitment firm

“Bonus caps were introduced in reaction to a public outcry and the perception of excessive risk taking in investment banking. That culture does not exist in asset management and therefore a cap would be counterproductive.”

It is impressive , not for its intellectual substance (it has none) but for its chutzpah!

Asset managers -unlike entrepreneurs who set up and run companies- do not take risk! Of course they don’t! They get paid 1% of a billion, billion pounds (do the math) whether they do well or badly. They do not create this wealth, they merely spend it – on themselves!

There are entrepreneurs in fund management (Smith,Woodford,Miller) – who take risks, do things differently and improve capital markets. These people are treated as pariahs by their colleagues because they are so conspicuously better at what they do than their peers.

But the majority of guys who get paid the big bucks within asset management firms are being paid for successfully managing risk, when they are doing no such thing! The quote is wonderful as it not only admits this , but uses it as a justification for this junketing to continue in perpetuity!

The party has been going on some decades, next year the FCA reports definitively. Then the sheep will be sorted from the goats, the wise virgins will have their candles ready, the revellers will find the financial orgy, rudely interrupted!