Why I wouldn't take 20% of your profits

Overpaid fund managers have left many investors feeling duped with their inflated performance fees. Tom Bulford exposes the hidden numbers and pitfalls every investor should be aware of when investing in funds.

A few weeks ago I was contacted by a man who, disillusioned with the performance of hisfund manager, had decided toinvest his money directly.

That's brilliant. It's exactly the way every investor should be thinking, in my view. The whole City machine is a racket and the sooner private investors sack their overpaid money managers, the better.

Anyway, this chap figured that I would have a better idea of what shares he should buy and so he made contact. "Tell me what shares to buy", he wrote, "and I will give you 20% of the profits".

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It took me one millisecond to come up with my answer. "I would be happy to suggest some shares for your portfolio, but I would not dream of accepting any share of your profits."

Of course, if I were to enter into the arrangement that he proposed it would probably get me into hot water with that great moral arbiter the Financial Services Authority. But even if it was legal, my answer would have been the same.

Why I'll never take an inflated performance fee' for my ideas

I want a fair wage for my work, no less and no more. If this work brings me into contact with people who think that my advice might be worth having then I am flattered and happy to try to help. And whilst I don't give specific advice in Penny Sleuth, I do offer a higher level service called Red Hot Penny Shares for serious investors who want detailed share tips.

To be honest, I think that the vast majority of people in this country are exactly the same as me on that score. They just want fair treatment, and they are willing to offer a bit of unconditional assistance when the opportunity arises.

So when I read something like this, my blood starts to boil:

"Ms Garrett-Cox's pay and bonuses totalled £6.1m over the last three years, including a signing-on bonus of £955,000."

Ms Garrett-Cox is chief executive of Alliance Trust. This is a £2.9bn investment fund that has managed, through the skills of this great guru and others like her, to achieve an investment return of 1% per annum over the last four years. Last year she was paid a salary of £405,000 and an annual bonus of £420,000. This was despite a performance that has been so indifferent in relation to its peer group that Alliance Trust has come under pressure from the activist investor Laxey Partners.

I do not want to get into an argument about performance-related pay which, within reason, should be quite acceptable. But my point is that the level of remuneration shelled out to Ms Garrett-Cox and her kind is just way too high. It is off the scale. It is obscene, indefensible, grotesque, sickening, immoral and, by any criteria, unjustifiable.

I don't usually find myself agreeing with the Archbishop of Canterbury. He seems to think that a comfortable lifestyle, including his own, can be achieved just by people going round being nice to each other. But he has swung his mace at City pay and I think he is absolutely right.

Fund managers, like bankers live in a parallel universe, in which they think nothing of shelling out £955,000 as a signing on bonus'. Presumably the lure of the £405,000 salary was insufficient. But look what else Alliance Trust has been shelling out. A look through the annual report reveals that:

The six non-executive directors pocket £255,000 between them for the arduous task of turning up to nine board meetings;

Robert Burgess (total pay £550,000) had to be given a few tens of thousand extra to pay for moving house from London to Edinburgh; and

Fellow director Alan Trotter (total pay £406,000) was lobbed a £50,000 fee on his appointment.'

Everywhere you look in the City, they're at it...

Let's not single out Alliance Trust. At other fund management groups the story is no different. Take Schroders. Last year its staff pocketed an average of £166,000 while at Jupiter Asset Management the average was £180,000. Remember that these averages include all low paid back office staff. So you can bet the executives get a great deal more. And if you want a basis for comparison, the average pay at BP last year was £70,000 while at GlaxoSmithKline it was £52,000.

Moral outrage apart, this matters for three reasons. The first is that fund managers are actually quite intelligent, diligent people who could be doing something far more useful in other spheres.

The second is that fund mangers are not going to vote against excessive pay in other companies for fear that the light will be turned upon them.

And the third is that their pay comes directly out of the money that others entrust to them. Every day millions are creamed off the pots of savers' money and poured into fund managers' pockets.

Something needs to change. It would be nice if we could rely upon fund managers' sense of decency, and unselfish fair play. But I am not that nave.

As far as I'm concerned, until they get a fair wage for their efforts and no more, fund managers will not be getting their hands on my money. I suggest in the strongest terms that you keep yours away from them too.

I hope you're already reading my Red Hot Penny Shares letter. That's where I reveal by best penny share ideas each month. But there's something else I'd like you to take advantage of...

Until next time, good investing.

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This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.

Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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