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Outside edge

An outsider could be forgiven for assuming that the movers and shakers of the fund management industry would be those responsible for running the companies. Increasingly, however, it is portfolio managers who have been moving and shaking the most.

Staff departures are scarcely new. They are treated as regrettable, nonetheless “local” difficulties. In a market suffering from a combination of lower sales, diminishing margins and greater competition, arguably, an industrywide problem is emerging.

One of the challenges of management is how to grow in-house talent. It may take time – normally a commodity in short supply – but it is the least expensive route. A more costly alternative is to lure rising starlets from the competition, with the ultimate coup being to win over an established star.

This raises a number of issues. Finding someone of the same or superior calibre to replace the lost fund manager is likely to cost considerably more. Then, once replacements are hired, the cost of keeping them adds to the revenue burden, albeit big-figure share options tend to be the name of the game.

Fund managers who have remained in situ for a while find their relative positions downgraded, some becoming disenchanted and more susceptible to the flattering noises outside the firm. Finally, disillusionment spreads to the lower-paid employees in the no less vital but more process-driven ends of the business. The pattern is one of escalating costs and declining morale.

Like any other occupation, fund managers change jobs for a plethora of reasons – professional, personal, a need to get away and a desire to move on. Their often lionised status, however, means that they frequently have the upper hand when it comes to negotiating pay and rations.

Yet their very success, the reason for which they are recruited, may have rested on a happy coincidence of their management style and positive market forces and may not persist in their new job.

It is therefore somewhat ironic that the FSA should accuse companies of wooing clients with past performance claims that may not be repeated when companies themselves are buying in fund management talent founded on the same credulousness.

There are other implications for the industry. The prospect of grand rewards for outperformance encourages some fund managers to take bigger risks. This may not necessarily have a happy outcome for retail clients and their advisers and if the outcome is very positive, it may not be accessible for long.

Many former retail fund managers attracted to the pot-ential fortunes awaiting them in hedge fund management have leapt across the divide to an institutional only remit.

It is bigger fund management businesses that have become most vulnerable to the departure of fund managers. The tightening rein of regulation, the introduction of additional in-house procedures and reduced flexibility in managing retail mandates has led some fund managers to seek alternative outlets for their skills – often with smaller groups with a more relaxed fund management style.

Yet when do we ever hear of a Chelsea or a Liverpool player suggesting that by joining Cheltenham they will be able to get back to playing real football?

Football fans are loyal to teams. Investors and their advisers, however, apparently follow star fund managers. Future returns from investment have never been certain and rarely consistent.

The people running fund management companies looking to their long-term prospects can never have been more aware of that.

Anne McMeehan is director of Cauldron Consulting

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