Wealth managers who spoke to FSA said they want to see fund managers receiving a variable bonus component related to performance, and one that is evaluated and paid out over several years rather than just, say, at the end of one year.
Ideally, part of the bonus should be reinvested into the fund rather than immediately paid out in cash.
Jimmy Ng, director of investments for Swiss private bank Bordier’s Singapore branch, said he looks for a talent-retention programme and checks the investment team’s compensation structure when considering a new manager.
More specifically, he wants to know whether managers are appropriately compensated for idea generation and teamwork during both up and down years, he said.
A red flag is when a manager does not give much thought to talent retention, he added. That raises questions about the ability to execute a strategy effectively year-after-year.
Ng said Asian managers tend to be relatively short-term and they typically don’t focus much on talent retention and remuneration structure.
“I hate to generalise, but US managers tend to be longer-term-focused.”
Wing Chan, director of manager research for Asia at Morningstar, added that China- based portfolio managers are often evaluated for short-term performance, for example on a quarterly basis.
Star vs team
Justin Kendrick, chief investment officer at Singapore-based Javelin Wealth Management said he tries to identify a link between pay and alpha generation.
That is why he favours fund houses that employ a “star portfolio manager” investment model over those that use a more team- or committee-based approach. With the latter approach, he noted, it can be difficult to identify the key decision-maker and understand how staff are paid.
“That doesn’t mean we ignore [the team-based] strategies,” added Kendrick, “but this is something we bear in mind.”
Another key issue is how remuneration is disbursed. Bordier, Javelin and Morningstar all prefer managers receiving pay linked to long-term performance, for example, three years instead of one.
Even more attractive would be a performance bonus paid out in a staggered fashion over several years. Some listed fund houses disburse bonuses in company shares, said Kendrick, which is another way of aligning the interests of manager and clients.
Both regulators and clients are pressuring larger financial institutions – notably bank-owned fund houses – to focus more on linking remuneration to performance over more than a one- year period, and to hold back performance-related bonuses, sources said.
Asian fund houses that lengthen their horizons in terms of remuneration and staff retention – especially those looking to expand internationally – are the ones that will attract more global capital.