Fund managers “unlikely” to scrap bonuses in Asia

Asia-based fund managers are seen as unlikely to mimic Neil Woodford, a respected UK-based investment veteran, who has scrapped bonuses for portfolio managers at his firm because he thinks they are ineffectual at boosting performance.

He was a former star fund manager at Invesco Perpetual, who set up his own firm, Woodford Investment Management, in 2014 that now has £14 billion ($18.5 billion) under management.

His decision to shun the bonus system that prevails across the global funds industry is a bold one that could backfire if Woodford IM fails to attract the top talent that has become used to such payouts, say industry observers. The firm's 35 staff will get a rise in basic pay and benefits as compensation.

Industry experts in Asia said they understood the logic behind Woodford's move, which hit the headlines this week, but they were sceptical about such a shift taking place in the region.

Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, said it was a bold decision but one that was unlikely to be widely replicated. “Bonuses reward good performance and business and are not paid for poor or average results,” he added. "This move raises aggregate costs, which would need to be recovered.”

Only smaller family- or self-owned businesses in Asia are likely to do something similar, suggested Aldcroft, although many investment firms are now paying much smaller bonuses than in previous years.

Star manager expectations

Even those in agreement with Woodford's reasoning were doubtful that bonus-scrapping for portfolio managers would catch on.

Peter Douglas, founder and principal of Singapore-based hedge fund consulting firm GFIA, said: “I was never under the impression that bonuses boosted performance – who was?” 

Fund house bonuses reflect the profitability of that portfolio manager’s products and their “star” value, he noted. The fund firms need to retain star managers, hence the multi-million-dollar bonuses paid to top performers such as Woodford.

“Performance compensation is largely in the form of career progression and wealth generation in the form of stock options/equity,” said Douglas (pictured left). “So [not paying bonuses] seems very sensible. But in many firms, it would be really hard to swing internally, I suspect.”

Blair Pickerell, former regional chairman of Japan's Nikko Asset Management, agreed there were structural reasons why this approach was unlikely to work in Asia.

"In many Asian markets, the desire to attract top fund managers and analysts and other investment staff remains high," he said. "For example, if a firm in China were to say they paid no bonuses despite excellent investment performance, it seems likely that the headhunting community would be all over their staff within a very short period of time."

Woodford's move could even backfire, at least in the short term, said Douglas. "Will he lose staff? I guess yes, depending on who gets what. But the net effect may well be that the superstars will go, as will the also-rans. [The move will] reward firms with strong process that don’t need top-percentile managers, but do need highly capable people to follow the process."

"War for talent"

Pickerell (pictured below) said the "war for talent" was still very much alive for top fund managers. The industry heavily favours firms, especially those gathering assets from institutions, that can produce strong long-term performance, he noted. "It is only logical that those teams, fund managers and analysts who have produced good results expect to be paid a good performance-related bonus."

Admittedly, said Pickerell, bonuses at many firms will be under pressure in the next year or two, given declining profitability for many asset management firms, the shift of assets from active to passive strategies and a relatively weak economic outlook. 

Overall, he added, most fund houses would prefer to have a cost structure that kept fixed costs relatively low and paid most compensation only once its managers had performed well. "This seems more logical than raising fixed costs and eliminating variable compensation," he argued.

Of Woodford's decision, one Asia-based investment firm chief told AsianInvestor he felt it was OK for fund managers to be on entirely fixed remuneration, as long as they got a share of the profits, as Neil Woodford does. There is nothing wrong with the concept of bonuses, he added: "As ever, it's the principles behind them that matter."

In a statement announcing Woodford IM's move, Craig Newman, chief executive and co-founder of Woodford IM, had said: “Many studies conclude that bonuses don't work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours.

"While bonuses are an established feature of the financial sector, Neil and I wanted to take the opportunity to do something different that supports the firm's culture and ethos of challenging the status quo."