UK: Underworked and overpaid?

UK: Underworked and overpaid? - The income of the average fund manager falls short of that of headline grabbers like Nicola Horlick but it's still enough to make many wonder what they do for their money.

by Alistair Blair.
Last Updated: 31 Aug 2010

The income of the average fund manager falls short of that of headline grabbers like Nicola Horlick but it's still enough to make many wonder what they do for their money.

'My favourite quotation about fund management,' laughs Ian Rushbrook, 'is that it's an indoor job with no heavy lifting. And overpaid.' Rushbrook is in a good position to joke at his profession's expense. When he took over the management of the Personal Assets Trust in 1990, its shares were £35 each. Now, they're £138.

Yet an outsider looking through the Personal Assets annual report might nonetheless feel that Rushbrook takes indolence just a little too seriously.

In the year to April 1996, he appears to have made just three investment decisions: he added to his holdings in Scottish & Newcastle and BT, and sold his holding in Edinburgh Fund Managers.

If that was three decisions in the course of a normal 200 working days year, it might seem bad enough. But consider this: Rushbrook works 12 hours a day, seven days a week, and has done for 30 years. What on earth does he do all day? He looks for really good investments. It takes an awful lot of looking. 'Every morning I run my valuation model for every company about which there's a news story in the FT. And every once in a while I find something that's compellingly cheap or dear, so much so that there can be almost no question that it's going to go up or down.

That's when I act.' Even then, of course, he doesn't always get it right.

But he does mostly. That same annual report shows that of the 31 investments Rushbrook held from April 1995 to April 1996, 29 went up, and two went down. The aggregate loss on the losers was 4%. The trust as a whole rose 26%. 'A very good year,' concedes Rushbrook.

At £19 million (its value in April 1996), Rushbrook's trust is a tiddler, but even so, 31 investments is a very small number. Not to Buffettesque levels, but well on the way (Warren Buffett holds about the same number of investments in a multi-billion dollar investment portfolio). And the turnover is always low, low, low. It's a subject on which Rushbrook has trenchant views. 'There's far more turnover than is necessary. The institutions are perpetual investors in equities, but on average they hold an individual share for under two years. I think there is big psychological pressure to be seen to be doing something - and that means buying and selling. But if you're a large institution, you'd be very happy to match the market performance, and the only way of doing that is to hold the bulk of the market and do no trading, because trading costs money.'

In fact, even then, the institution wouldn't match the market, and to understand why is to realise that the jibe that the average fund manager fails to beat the market is untrue. The fact is, the institutions are the market. Fund managers as a profession are not uniquely bad performers. But they are almost uniquely subject to measurement, and the measuring rods which are used put the benchmark of average performance in an unattainable spot. They do so by ignoring the costs of trading: the bid/offer spread, which keeps the market-makers in business, commissions payable to the brokerage industry, and the costs of the fund managers themselves (you can argue about how much they should be paid, but as to whether, you're wasting your time). Not bearing that little lot puts the indices around 2% ahead of the fund managers on average, and if you take that 2% into account, you'll find that only 50%, not 80%, of fund managers fail to 'beat the market'.

None of which negates Rushbrook's proposition that fund managers should spend more time looking and less time trading. Fund managers could close the gap on the indices by doing less trading. Why don't they? Because it's not what the investing public or the trustees of the pension funds want. Almost every fund management house offers tracker funds (which simply buy the shares in an index and hold them for good). Indeed some, such as Virgin, only offer tracker funds. They are growing, but still attract a relatively small amount of what we invest. The fact is, through ignorance, inertia, or most likely, wishful thinking, we and the trustees cannot shake off the belief that we can find a fund manager who, by active trading of shares, will persistently win back not only that 2% for costs, but more besides.

And that superior performance is achieved. By a small group, it's true, but if you know where to look, you can get it, as the cerebral Rushbrook, scourge of the conventional performance seeker, demonstrates. It's such a nice thing to have, that even though we can't all have it, we're damn well going to carry on looking for it. And with so many voters in search of such an elusive goal, it really shouldn't be surprising that the few candidates who appear, however transiently, capable of delivering it, cash those votes into Nicola Horlick-style salaries.

The lone Rushbrook, running his tiny fund from a flat in Edinburgh, meeting few companies and forever tweaking his valuation models, is a world away from the public image of the fund manager, set by the News at Ten exposures of Horlick and the errant Peter Young. Rushbrook even boasts a few grey hairs. More in the mould is Andy Crossley who at 33 is in charge of several small company funds amounting to about £450 million at Invesco, a UK quoted group which runs $100 billion of investors money from several offices around the world. What does he do all day?

Crossley cheerfully hands over his diary. This is more like it. At 8.45 every morning, a meeting of the six-strong UK team to discuss the companies they have seen the previous day, to take calls from brokers to get their instant reaction to results announced that morning (most companies release their profits announcements at 7.30am) and to discuss those results among themselves. Nine o'clock Monday morning, a meeting of all fund managers - UK equities, bonds, emerging markets, European team - to assess what's happening on a global basis. Ten o'clock on Mondays, the smaller companies team consisting of Crossley plus two divvies up this week's work, finalises outstanding investment decisions (that week, it was, 'Shall we take shares in the Newcastle United flotation?'), examines last week's top and bottom performers and once a month takes two to three hours to review each of their 230 or so holdings one by one, focusing on a graph delineating each share's progress against the index. 'Often, there's not a lot to be said, but I think it's important that we formally do this.'

In addition to these regular meetings, Crossley's week is peppered with investment board meetings, new client presentations, meetings with Invesco's marketing people and meetings to prepare for meetings: there are plenty of diversions from what clearly excites him most: meeting the companies he invests in (although the two hours set aside for the 'Hard men of soccer lunch with Wedgie' - an item we didn't go into - presumably runs it close).

Crossley 'was interested in investment from my teens'. When an uncle gave him £500 at the age of 15, there was no nonsense about having to save it, and 'Greencoat Properties, Carpets International, a little bit in gilts and a Krugerrand' had more appeal than a hi-fi or bicycle and returned useful profits that were eventually buried in a university overdraft. The thought process that picked out those four investments at that tender age gets full reign nowadays. Unlike Rushbrook, Crossley attaches great importance to meeting managements. In one week in spring, he has 11 hour-long company meetings in his diary and he and his two colleagues will altogether meet 500 companies during a year. 'Management is key, but it's also very difficult to judge. The problem is, they know what you want to hear. Their brokers have primed them to press the right buttons.'

Although he holds plenty of exciting new companies - Sage was a 10-year favourite until it simply grew out of the small companies sector, Psion and Games Workshop are two of his top 10 holdings - his is not a hi-tech or sexy sectors portfolio. His biggest holding currently is estate agent Hambro Countrywide: 'When a Manchester University professor said house prices were going to fall in real terms for the rest of the century, it had to be a buy.' He delivers a penetrating rundown on why ABI, caravan maker to the masses, is chock full of value. 'The average punter has more money in his pocket. Last year he replaced his Cavalier. This year, it's going to be the caravan. Second-hand prices have firmed: now it will be new. Caravan sales in 1996 were 17,000 against a long-term average of 27,000. They haven't gone out of fashion. Membership of the Caravan Club hasn't fallen and attendance at the Caravan Show last year was the highest ever.' How does he know all this? 'By asking the management.' In the face of a falling share price, over the last six months Crossley has topped up his shareholding in ABI from 3% to 14%.

Ideas like ABI start with computerised screening of stocks, looking for those with low price/earnings ratios but high profits growth: 'This happens when people disbelieve the forecasts: that's an opportunity to make money.

In this business, you have to have self-belief.'

Crossley's average holding period is two-and-a-half years, a touch longer than the average, but Jiminy Cricket compared with Rushbrook. He has more stocks too: 230 across his £450 million. The extra costs of trading have been more than covered. Crossley's unit trust has appreciated by 155% in the past five years, and the advance has been steady: he's been in the first quartile every year which puts him in an elite bracket.

But not quite as elite as Foreign & Colonial. The UK's first investment trust was set up as long ago as 1868. Sterling performance, from investing globally as well as wisely, has attracted 110,000 shareholders. Last year, its market capitalisation of £1.7 billion briefly put it into the FT-SE 100 but uncharacteristically pedestrian performance saw it ejected a few months later. Since 1970, Foreign & Colonial has been led by Michael Hart, a quiet City legend. Hart retired in March and his desk was taken over by Jeremy Tigue (if you ever meet him, it's pronounced 'Tee').

Tigue read history at Oxford and joined Foreign & Colonial on graduation 16 years ago. He looks as conventional as fund managers come: you wouldn't imagine him working in solitude in an Edinburgh flat, nor at a hard men of soccer lunch. He politely declines to disclose his salary (as did Crossley) but points out that Hart's is listed in the annual report and was £249,000 last year plus pension contributions worth about the same again. There's also a handsome options package, but the whole thing is considerably less than the numbers headlined by Nicola Horlick.

Foreign & Colonial reckons to hold a share for around four years on average and unlike the other two, its natural province is the big companies everybody knows. Last year its top 10 holdings included Shell (they've held it for 60 years), BAT, BTR, Glaxo Wellcome, BT, GEC and BP.

Right up front, Tigue happily acknowledges the herdishness of fund managers, including himself. 'It's terribly difficult to make a stand - look what's happened to PDFM (where expectation of a big downwards correction in equity prices has led its fund managers into cash, and underperformance). It really isn't necessary to make such big bets. Having so much cash is trying to win by a mile, at the risk of losing by a mile. It's enough to win by a yard. Anyway, we're perennial optimists in equities. We don't try to time markets (to get out of shares in anticipation of a falling market).

We just don't think we're that clever. The most we would do is to be a bit geared - say 10% or 15% - if we were terribly bullish, and ungeared if we felt a fall was due. That's where we're trying to get to right now.' Tigue's stance is right in the middle between Rushbrook and Crossley. In his small company investment trust, Crossley is nearly 30% geared. But Rushbrook has 18% of his fund in cash.

Tigue's diary looks remarkably similar to Crossley's and because it's so crowded, he says, 'there's not enough time to cogitate quietly. It's even squeezed out by the reading. Reading analysts' circulars, annual reports: we all suffer from information overload - being able to read quickly is a vital qualification for this job.'

Whereas Crossley values broker research even if what really pleases him is finding a conclusion with which he disagrees, Tigue tends to be dubious about it. 'Stockbroking has changed enormously.

It used to be purely advisory, but now the big integrated houses make money from trading their own books. Analysts are under pressure to generate ideas - to generate activity. I'm suspicious of their recommendations.

A fund manager has to hang on to his or her common sense. So why do I read it? Because you have to know what people are thinking to understand the market. And it's good for basic information. But I spend less time reading the research than I did five years ago. It's less valuable.'

Tigue reckons on five company meetings a week. 'We take the results as read. We do a lot of preparation and quiz them on margins and cash-flows and what's driving their business. We won't invest if we don't think the management is good - however cheap it looks, the risk of something going wrong just isn't worth it. But we don't invest in management per se: it's the company you invest in. If the company's in a lousy sector, excellent management is no comfort. In a good company, though, good management is the icing on the cake. How do you judge? Principally by whether they have delivered historically. But even then, you have to be careful not to confuse a good market with a good management.'

Despite their different approaches and varied experience, on one thing Rushbrook, Crossley and Tigue are absolutely agreed. They believe fund management attracts the best people. In his current quarterly report to shareholders, Rushbrook's fellow director, Robin Angus, commits to writing views expressed by all three: 'Fund management attracts people who are unusually able, intelligent, committed, motivated and anxious to succeed.

Rewards come earlier than almost anywhere else; the rewards are higher than almost anywhere else; and people are prepared to work incredibly hard to earn them ... prima donnas ... you lose some, you gain some, and meanwhile the supply of equally gifted understudies is almost limitless.' And that's part of the reason why Personal Assets has 10% of its money invested in the fund management sector.

Not everybody would agree that this is 'incredibly hard' work, but as to the self-confidence that must go into making the assertion, we'd all recognise it's a profession with plenty of that.

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