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Fund managers take long view by scrapping bonuses

Iconoclastic it may be, but ditching bonus payments in asset management should lead to longer-term thinking. Star UK investor Neil Woodford is leading the way by paying staff only fixed salaries, while former trade body head Daniel Godfrey is to launch an investment trust on the same principle.

It is fitting that market participants are embracing reform. In investment banking, it took a crude bonus cap imposed by European lawmakers to rein in the financial risks caused by traders’ winner-takesall mentality. Asset managers pose less systemic threat and are therefore less deserving of heavy-handed intervention. Like investment bankers, though, fund managers tend to take a big share of any upside while clients suffer almost all of the pain. Average pay per fund manager fell in just three years between 2004 and 2014, according to a study of 18 global firms by think tank New Financial. But, compensation quickly rebounded to exceed the previous high.

That undermines the longstanding industry argument that variable pay gives firms cost flexibility, capacity like steel and shipping.

Judged on traditional merger logic, this is a fail. There are few obvious synergies. The two construction and cement giants preside over a sprawling empire of over a hundred subsidiaries and have little geographical overlap, according to an analysis by Deutsche Bank. That, along with political considerations, means it’s unlikely jobs will be slashed, or by allowing them to slash bonuses in a downturn and raise them when a fund outperforms. Woodford Investment Management (WIM) boss Craig Newman, meanwhile, rubbishes any purported link between bonus payments and fund performance.

But, the best reason to cut out annual bonuses is that they encourage short-sighted behaviour. That’s unsuitable for firms aiming to take a longer view: the Woodford Patient Capital Trust, which has just under £800 million in assets and expects to hold investments for at least five years, is a case in point. Godfrey’s investment cement production capacity, 35 per,cent of which lay idle nationally at the end of 2015 according to state-run Xinhua News Agency, will be closed down.

So, why merge the companies at all? For planners in the ruling Communist Party, creating a bigger company under centralised control could make it easier to get things done down the road. The company trust is likely take a similar approach, says a person familiar with his plans.

As owners of WIM’s management company, Woodford and Newman’s earnings will still rise and fall with the performance of the business. But, if more firms across the industry adopt a nobonus policy then it is possible that fund manager pay could be less prone to being ratcheted up.

Fundamentally, though, it is good to see fund managers tackling their own pay problem. Few have resisted exorbitant corporate compensation packages in recent years, fuelling suspicions that asset managers’ own remuneration is equally indefensible. Simplified pay structures should at least make it harder for that accusation to stick. will have a bigger balance sheet so can better weather a downturn. There’s some bureaucratic efficiency to be had too. Mergers have cut the number of central government-run firms from 111 to 104 this year, and numbers could eventually fall to 40, official newspaper Economic Information Daily reported last year.

That may eventually create companies that are a little less bad. But, it will take more than that to stop them from sucking up credit and dragging on growth for years to come.