Mike McNaught Davis
CFA holder and one-time fund manager and financial marketer, Mike now lends his exceptional talents to Copylab's Edinburgh team.More articles from Mike McNaught Davis
There was an old adage when I first arrived in the fund management world, that fund managers would never look out of the window in the morning as they would have nothing to do in the afternoon!
How times have changed.
In 1987, when I was a trainee fund manager specialising in Japanese equities, a computer was a rare machine produced by Hitachi or Toshiba, and not something I had on my desk.
Instead, we were equipped with the Japanese company handbook (brief one-page summaries of all the listed companies in Japan) and had the use of a “quick machine” which was anything but and yielded minimal information. Datastream would chug away for most of the day, printing off endless charts and prices that today can be accessed with the click of a mouse.
Indeed, technology has transformed my old industry. The typical fund manager is now surrounded by screens and inundated with a constant flow of information. There is little respite from company earnings announcements, meetings with management, performance reviews, and conference calls with colleagues around the world.
It is a much faster-paced, more connected, and – to be honest – more professional world than ever before.
Additionally, in the late ‘80s, fund managers were very much the poorer cousins of the “new world” of (post-Big Bang) investment management. Broking and corporate finance were where it was at and those careers were accompanied by the most lavish pay packets.
Dial forward to today and fund management is now, certainly at the upper echelons, the best-rewarded profession in the City – and increasingly one of the most pressured.
This largely reflects the perception of where the value is in the chain: corporate financiers can of course still make a mint but normally only when deal-making picks up, as and when animal spirits return to the corporate world. Brokers are middlemen and encourage the purchase and sale of stocks to their clients, but with little personal risk.
But the value added by fund managers is much more visible, in terms of money made for their pension fund, charity and retail clients, and remuneration increasingly reflects that. While the industry has changed radically in many ways over the past several decades, the motivations arguably haven’t.
So, what motivates a fund manager?
First and last, it is performance. Performance is the key proof statement of the fund manager. You live and die by it. As with a premiership football manager who is said to be only five or six defeats away from being fired, so it is for fund managers, who are arguably a few poor quarters away from the sack – or at best, a sideways transfer into the marketing team!
While this is a slight exaggeration, the manager is always under pressure. Strong performance builds a reputation and attracts assets to the fund. The reverse is also true.
Despite protestations from consultants and pension funds that they aren’t concerned by short-term wobbles and only focus on long-term returns, performance figures are available every month and hang over managers like a teetering boulder.
Fund managers are necessarily competitive beasts. This does not mean that they are aggressive and foolhardy risk-takers; rather, they are normally focused individuals and determined to do well for their clients and themselves.
Freedom to perform is an important ingredient. Most managers prefer only limited restrictions in terms of fund guidelines and working practices. Larger houses can be bureaucratic and political and, in recent years, they have faced something of an exodus towards more boutique fund management shops, which are perceived to offer greater autonomy.
Recognition is important to the fund manager and this breaks down into two key factors: compensation and promotion.
First, the filthy lucre! As mentioned, fund managers and research analysts are handsomely rewarded these days, with their generous pay packets intended to act as a compelling incentive.
But here too, things have changed.
Over the last decade, and certainly following the Global Financial Crisis, asset managers have attempted to align the interests of their fund managers with those of the clients by matching remuneration with the long-term performance of the fund. While salaries are normally impressive, it is the bonus that can astound. Much of this will be deferred and is often invested back into a client fund, providing further incentive for the fund manager to perform well.
Regarding promotion, all fund managers are keen to prove themselves, to garner more acclaim and to manage more money. That is natural. Junior fund managers want to be senior fund managers. Some will move to achieve this aim; others will sit tight and bide their time until a senior fund manager retires or moves on himself.
Finally, there is also the thrill of being in the middle of key economic and political goings-on, which often have a bearing on the fund. Given the inevitable gyration of events (macro and micro), there is never a dull moment. Meeting senior businessmen, CEOs and entrepreneurs makes the job exciting.
So, what don’t fund managers like about the job? Firstly, there are the factors that cause the mouth to droop, whatever the industry: administrative functions, long hours, general pressure.
Needless to say, a downturn in performance, especially if it’s sustained, can take a heavy toll on a fund manager. When this happens, the danger is that the manager begins to try and force performance, perhaps going against the fund’s philosophy and process, or taking on excessive risk. In a few extreme cases, managers may even cross ethical or legal lines in an attempt to turn performance around.
Excessive admin is irksome and distracts fund managers from their main work. While this is common across the industry, it can be more of an issue at the smaller or one/two-man band investment houses where staff numbers are tight and admin functions have to be spread around. Though not an administrative function per se, investment writing can be seen as a chore by many managers, who frequently welcome the help of a knowledgeable and dependable scribe, or indeed, outsource the function.
The hours can be long but, in my experience, few fund managers would describe them as excessive. Those who work very long hours tend to do so by choice or from a real interest – almost addiction – to markets and investing. “All nighters” and weekends in the office tend to be the preserve of corporate financiers.
Ultimately, weighing the attractions with the frustrations, fund management wins out against other similar financial or City-based professions, with a scorecard heavily in the black when assessing items such as compensation, hours at the coal face and whether the job amounts to an interesting and fulfilling career.
The fund management world has without question become both more professional and more highly pressured over the past 30 years. At the same time is it is more dynamic, more efficient and certainly better rewarded. The pressures themselves have evolved as competition has grown with greater emphasis on performance. The good news is, this should all ultimately be to the benefit of all investors.
Looking out of the window in the afternoon is still of course an option, but is little practiced by the modern fund manager.