By Chris Newlands
It is hard to believe there is a more unpopular man among asset managers right now than German MEP Sven Giegold.
Based on recommendations from Mr Giegold, the politician responsible for steering the Ucits V directive through Parliament, European policy makers last week voted to reform – or rather hack into – the bonus structure of fund management professionals.
At a meeting last Thursday, the European Parliament’s economic and monetary affairs committee voted in favour, albeit narrowly, of capping the bonuses of asset management staff at 100 per cent of their salary. For a humble journalist like myself it is hard to get worked up about such restrictions, but in a market where one unnamed executive at Pimco Europe – the European arm of the world’s largest bond manager – took home a frightening £29.9m in 2011 it is safe to assume the pay cap will pose something of a problem.
The Ucits reforms were the first legislative opportunity for the EU to extend to retail fund managers the existing pay curbs applied to banks and hedge funds, including stricter disclosure rules and requirements to defer pay.
“Fund managers are seen as problem makers [like banks] rather than solvers,” says Alex van der Velden, founder and chief investment officer of boutique fund company Ownership Capital, who was previously part of the investment team at PGGM, the Dutch pension scheme.
While he sees the merits behind what has now become known as the “Giegold proposal”, he is worried the consequences of a bonus curb would simply increase fixed salaries or what he calls the “non-performance part of fund managers’ pay”.
Like many others, he believes fund managers will simply “get creative” and find other ways to reward themselves, regardless of performance.
“There will be an explosion of boutiques [opening] where fund managers pay themselves big dividends,” he told FTfm.
But the proposals have a long way to travel through the corridors of Brussels before making the cut as a directive.
The vote at 22 in favour and 16 against was surprisingly close and the matter will now go forward to the full parliament for consideration in May. “We would expect that intense lobbying on this issue will take place between now and [then],” says Declan O’Sullivan, managing partner at law firm Dechert.
Although it might be that tweaks are made to the final directive, policy makers also voted in favour of another “Giegold proposal” to impose “high penalties” for funds that charge performance fees but fail to outperform their benchmark – something that will rile asset managers further.
It is understood that the penalties may take the form of deductions from annual management fee charges.
“Nobody should ever pay a performance fee,” says outspoken fund veteran Terry Smith, who runs a concentrated portfolio of 20 to 30 stocks. “It encourages managers to take very dangerous bets. It leads to the investment equivalent of placing a single number at a casino.”
Mr Smith also cites the example of how charges would have affected a $1,000 investment in Berkshire Hathaway when Warren Buffett, the investment guru, took over as chief executive of the US company in 1965.
“That $1,000 investment would be worth $4.3m today but, had Mr Buffett been charging an annual management fee of 2 per cent and a performance fee of 20 per cent instead of a flat cost, just $300,000 would belong to you,” Mr Smith says. “The remaining $4m would be lost in charges.”
Good news then for end investors but another potentially large headache for asset managers. As one senior fund management executive puts it: “Mr Giegold will not be on the Christmas card list of many asset managers this year. He certainly won’t be on mine.”