Merryn's Blog

Leave fund managers' bonuses alone

It's pointless the EU involving itself with the issue of fund managers' bonuses. The industry will take care of the problem itself.

I wrote last week that the financial industry and the executives of the world's large companies would to a degree have only themselves to blame if governments started to have a go at regulating their pay.

After all, it has been clear since the crisis began just how the public feels about bank chiefs and the CEOs of public companies using a mixture of the talent myth and a lack of transparency to pay themselves many millions of pounds a year. And they have done nothing about it. So we had the caps on banker bonuses.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

And now we have an extension of this plans from the EU to cap the bonuses of fund managers running UCITS funds (those able to be marketed to retail investors across Europe). The ideal is to enforce a 1:1 ratio of bonus to salary (so no bonus over 100% of salary) and to make up to 60% of that bonus variable, deferred and mostly paid in units of the fund the manager runs.

But just because this was beginning to seem inevitable doesn't mean it makes sense. There is no doubt that fund managers are overpaid for what is very often little more than an admin and lunch job, and that CEO pay is out of control (if you recognise the name of the firm any one CEO runs, odds are he is taking home £3m plus). But that doesn't make it the business of governments to cap it.

Advertisement - Article continues below

You could, if you felt like it, make a case that bank bosses should be subject to government pay controls on the basis that their businesses are effectively insured and supported by the taxpayer. But you can't do the same with fund management this is a genuinely private industry (albeit one that holds most of our pension assets).

But the key point here is that firms can only keep paying these huge salaries if they are making supernormal profits. And how do firms make supernormal profits? Lack of transparency on pricing and monopoly power both things our big managers have long had. But in the UK, this is changing.

The Retail Distribution Review (RDR), alongside some pretty feisty pricing from the tracker and exchange-traded fund(ETF) industries, has already kicked off the beginnings of price competiton in the market.

These days when new funds come to tell me about their fantastic new product, they always make a big deal out of their low prices or at least the shenanigans they have gone through to make their prices look low and we are seeing the first rounds of fee cuts in the investment trust industry.

Last week,Baillie Gifford agreed with the directors of the trusts they run (of which I am one) to cut management fees, and Fidelity has cut the fees on its ludicrously expensive China trust (although they aren't dumping the performance fee).

Advertisement - Article continues below

I can't see why this wouldn't all continue given that the post-RDRindependent financial adviser(IFA) is incentivised to find low-cost funds rather than high-commission funds, and that the post-RDR investor is incentivised to seek out low-cost funds for his DIY portfolio.

At the same time, as long as the authorities do the right thing, we will soon see rules preventing platforms (such as Hargreaves Lansdown and the like) accepting payment from fund providers for listing their funds.

You will hear no end of smaller funds saying they can't afford the fees they have to pay to get in the shop window of platforms. When no one is allowed to pay the fees (and the platforms have to charge the client directly), the playing field will be levelled.

Look at it like that and you will see that there is a good chance that, having had a go at dealing with the problem rather than the symptom of the problem, if we now leave the fund management industry to its own devices for a while, its supernormal profits, and hence high pay problems, will take care of themselves.




The power of mean reversion

When it comes to investing in funds, don’t chase the top performers – look for the cheapest ones.
1 Apr 2019

The most important number to look at before you buy any fund

Many investors get distracted by past performance when they buy a fund. But there’s something else to consider that will have a much bigger influence …
22 Mar 2019

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Share tips

Asian income stocks: where to find the continent's top money machines

International dividends shouldn’t only mean companies in the US or Europe – the Far East has plenty of big payouts to offer. Cris Sholto Heaton looks …
6 Feb 2020

Most Popular

Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019