Back in 1992, I went to one of London's finest restaurants to listen to a director of one of the City's biggest fund-management houses giving his view on Midland Bank. The bank was facing a takeover bid from HSBC at the time. "There is", he opined, "a lot of fat in that company".
I chuckled to myself as he sat scoffing down an exquisite meal that he was charging on expenses the irony of the situation was lost on him.
But whatever unnecessary costs there may be in Britain's banks, it is nothing compared to the excesses of the fund-management industry. It's actually incredible what these people get away with. Let me show you exactly what I mean...
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Average wage bill £155,000 - £201,000
Here are some numbers that caught my eye. Fund manager Schroders has just agreed to buy rival fund manager Cazenove Capital for £424m. £29m of this is "the effective future cost of existing deferred share compensation arrangements for Cazenove Capital Group employees". There are 329 of them, so they stand to pocket an average of £88,000 each. I also note that Schroders expects to achieve "economies of scale, principally in UK funds distribution and infrastructure of between £12m and £15m per annum".
That is a heck of a lot of cost to be able to take out of a merger and we can only wonder what might be achieved if the industry went through the sort of consolidation and ruthless efficiency drive that is routine in most industries.
In this labour-intensive business, the first thing to be cut would be pay. I have been taking a look at the latest annual reports of three of the City's quoted fund-management groups Schroders, Jupiter and Aberdeen Asset Management. The average cost per staff member is £155,000-£201,000. This excludes the directors, who are paid multiples of this, but it does include the newest recruits and the most menial. Senior staff will get much more than this average.
Fund management is not a particularly difficult job. If it was there would not be so many of them! It does not require years of training, there are no barriers to entry and new firms are founded all the time. It has few satisfied customers, and a great many who feel they are getting a rough deal. Rewards for delivering an indifferent product in a competitive market should be thin, not fat.
A salary cap for fund managers
For sake of comparison, I have looked at Renishaw and Abcam, two of this country's most successful businesses in the fields of advanced measurement and antibody supply respectively. These are highly innovative businesses, they have taken years to build market-leading positions and have thousands of satisfied customers. The average staff remuneration at these two businesses is almost identical, at around £45,000 per year.
Fund managers' pay is about four times that of these most successful private sector businesses. This is all wrong, and now members of the European Parliament want to do something about it. They have proposed a salary cap on fund managers. Naturally this is causing much consternation in the marble halls of the City.
At present, the proposals look full of holes. The mooted cap would apply to the level of bonus but not to basic salary. Some funds would be affected but managers of hedge funds, where pay and bonuses are stratospheric, are untouched.
The campaign, led by the German Green MEP Sven Giegold, is seen as merely vindictive rather than a means of ensuring macroeconomic stability. The fund managers themselves warn that these moves could lead to "a loss of talent from the industry" (cue laughter).
Although fund managers do not cause financial instability in the way that banks can, they do nonetheless chase short-term performance in a way that is resented by many quoted companies. As guardians of their clients' money, they need to speak out about excess pay in their investee companies, but are hardly able to occupy the moral high ground.
But the biggest issue is that through a combination of over-trading, backward looking investment strategies and a preference for engineering fancy products over the simple business of identifying sound investments, they deliver a rotten return for their clients.
To be fair, the industry is already under pressure. Fund managers must now sit increasingly onerous exams. The Retail Distribution Review has cut the cosy relationship between fund managers and financial advisers. And funds are now obliged to come relatively clean about their true charges.
But if you are fed up with receiving a lousy investment return, while lining your manager's pocket with gold, the best solution is to take matters into your own hands and run your own portfolio. Many of us have been doing it for years and very successfully too!
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
