Gloomy outlook for fund manager jobs

Nick Watts, head of Watson Wyatt's European investment consulting practice, is among those suggesting the sector is in poor health. He says: "There are a lot of redundancies left to be made. The industry will continue to contract. There needs to be rationalisation of products with a focus on those that genuinely offer competitive advantage."

Watts is not alone. Mercer Oliver Wyman, a consultancy, estimated in June that more than half the UK's 2,100 mutual funds were managing too little money to make a profit. Compounding the gloom, the Centre for Economics and Business Research, an independent think tank, said in the same month that fund management would be the weakest area of financial services in the City of London this year, with job losses totalling 4.2%. The decline was predicted to continue into next year.

Research by Financial News in July found that many UK fund managers were overstaffed, with some employing significantly more front-office staff than others to manage the same amount of assets.

There have already been many fund management redundancies; 80% of funds have cut costs in the last three years, according to a joint report by KMPG's investment management and funds practice, and Create, a research firm. Merrill Lynch Investment Managers, Aberdeen Asset Management, Edinburgh Fund Managers, Northern Trust, State Street, Baring Asset Management and Isis Asset Management are among those that have wielded the axe.

John Romeo, a consultant at Mercer Oliver Wyman, says these cost-cutting measures are merely a prelude to big structural and strategic changes. In future, many functions will be outsourced, including the back office and everything from marketing and distribution to portfolio management itself, he says.

"Funds that are strong in marketing and distribution will sometimes use someone else to manage the money," says Romeo. Fund managers at those firms will find themselves out of a job.

Further restructuring may come from insurers, which consultants say are keen to sell fund management subsidiaries. Hoped-for cross-selling opportunities have not materialised and they need to raise capital.

Patrick Morrissey, managing director of search firm Sheffield Haworth, believes this does not augur well for employees. He says: "Sales of asset management companies lead to job losses, there is no question about it. It is just a matter of degree."

Not everyone is so pessimistic. Giles Crewdson, managing director of search firm Korn/Ferry in London, says stock market gains in recent months have taken many funds out of the danger zone, making additional job cuts unnecessary. Crewdson believes any future changes are likely to target compensation. He says: "There are going to be more and more clearly defined pay structures that reward for performance. From now on, if you underperform the market, you will get no bonus at all."

Fund managers urgently need to move toward a model of variable costs and variable pay, says Crewdson. Professor Amin Rajan, chief executive of Create, agrees. He says: "Fund managers need to live with high revenue volatility equivalent to that in the oil industry." He also believes many need to strengthen the link between performance and pay.

Fund managers recognise the importance of variable pay. Charles Prideaux, head of equity products at Merrill Lynch Investment Managers (MLIM), says a new pay scheme was introduced for equity staff last year. It has three performance elements: one related to performance over one, three and five-year periods; a further related to revenue generation and managers' success at bringing in new funds; and another related to teamwork and contribution to research.

Prideaux says: "It is all about being transparent in the way people are paid for achieving a particular standard of performance. Previously, there was less of a formulaic link." MLIM plans to introduce the scheme to fixed-income fund managers this year.

Britannic Asset Management has also been scrutinising how its staff are paid. Leslie McIntosh, the firm's chief executive, says bonuses are harder to come by. "We have tried to make the hurdles much tougher than before to ensure we are not rewarding for mediocre performance and just tracking the index. We want to pay for outperformance."

Robert Talbut, chief investment officer at Isis Fund Management, agrees. He says: "Pay is clearly focused on encouraging fund managers to strive for excellence instead of performing in line with the benchmark. In the past, pay-outs were too frequently given to medium performers."

Talbut says this is good news for top performers, who will be paid as much as, or more than, they were before. However, he warns that pay will go down for less productive staff. "The variable element will be nowhere near as good as in the past."

Portfolio managers returning from summer holidays may therefore feel under greater pressure than ever to outperform whichever indices they are benchmarked against. Otherwise, some may wish they had stayed at home instead, studying research reports to give them an edge over their rivals.