Life doesn’t seem so tough for fund managers when they can bask in the sun by the Mediterranean, sipping Pimm’s on the roof terrace of Le Méridien in Nice contemplating when a market revival might come. It’s certainly a more enviable situation than that faced by clients back home wondering if they will ever be able to afford to retire.
Fair enough, conferences like the Fund Forum often meet in attractive venues. But the delegates to this annual European fund management jamboree might have acted with a little more humility in the face of rising criticism of their performance.
While the temperature outside the conference hall soared well above 30ºC, inside the atmosphere remained cool, with managers seeming to respond to some of the accusations thrown at them in a lighthearted manner as if they were directed at someone else.
So it fell to Jonathan Compton, founder of Bedlam Asset Management, to raise the heat. Once a fund manager at Samuel Montagu, he set up his firm with the intention of shaking up the industry. He claims to be drawing the minimum wage – in stark contrast to peers.
In his presentation, he launched into an attack on fund managers. Rather than provoke angry retorts or even embarrassment, though, his comments drew laughter from the floor. Why should the delegates have found it so amusing that the top 30 managers by size increased fees for mutual funds by 50% over the 18 months after June 2001?
Compton accused managers of becoming increasingly incompetent. “The average fund manager is innumerate and illiterate,” he said.
The absurd manner in which some managers run their portfolios was illustrated by Bedlam’s assessment of the turnover of three top fund managers over a 24-hour period. During this time, he said, they had sold Vodafone stock 442 times and bought it 320 times. Between them, they were buying and selling Vodafone about once every 15 minutes. Meanwhile, the average fund manager earns $220,000 a year and managers with five years’ experience of managing an active fund earn $330,000 even though they lost a third of the money they managed in 2002.
Paying an arm and a leg Compton also warned that investors would increasingly bring lawsuits against managers. “Fund management and sex are the only two industries where customers don’t get what they pay for,” he said. If a doctor amputated your leg when he was supposed to remove your appendix you would sue, he pointed out. He noted that about $6 billion of the $30 billion of current litigation against fund managers worldwide involved UK managers. Compton reckoned that settlements of between $1.5 billion to $3 billion would emerge from that $6 billion. And as John Towers, vice-chairman at State Street, pointed out: “Lawsuits against mutual funds in the US are up by one quarter since 1998.”
Towers addressed the lack of trust that end investors have for consultants and fund managers. “In all my years in this industry I have never known such a poor level of trust between intermediaries and their clients,” he said. That’s no surprise really when, for example, around 250 US public companies have restated accounts for 2002, compared with 97 in 1997 and three in 1981. However, Towers was upbeat. “Behind each failing there lies an opportunity,” he said, “a chance to move our industry onto new ground, to create new products, and set new boundaries of trust with our clients.”
Other speakers also tried to remind fund managers about why they were employed by emphasizing the importance of the customer. Bob Pritchard, CEO of Marketforce One, a marketing consultant, said: “Customer service is four times more important than advertising but you spend more time on advertising.” For example, he noted, the return on investment for customer services is 31%, for new products it’s 16% and for advertising and promotion it’s only 8%. In addition, business growth is driven 42% by customer service, 29% by new products and 28% by advertising and promotion. Pritchard added that companies that had differentiated themselves by appealing to customers’ emotions and providing great service were able to charge 9% to 13% more than competitors and still win business.
The lack of enthusiasm and initiative during the first CEO panel, however, did nothing to offer hope that things might change for the better soon in the industry. Delegates confided that they couldn’t sit through the entire hour.
After a long, hard day listening to presentations about the dire state of the investment industry, managers were, however, able to relax at a cocktail reception followed by a boat trip to Monte Carlo for a gala dinner.
Monte Carlo is a favourite among delegates and hopes are running high that the event will be held there in 2004. But pension holders might prefer the organizers to choose a less ritzy venue. When the Fund Forum was last there in 2001, some delegates were not averse to taking helicopter taxis and putting them on expenses. The UK National Association of Pension Funds has the right idea – its conferences tend to be held in such places as Eastbourne and Glasgow.
