Fund managers offer equity to keep staff
Fund managers are fighting back to stop staff defecting to hedge funds by offering them equity incentives. Mellon Financial Corporation has agreed to hand substantial phantom equity to staff working at its Newton Investment Management operation.
The initiative is designed to end defections that have bedevilled Newton since 2001.
The phantom equity will equate to 12% of the value of Newton, whose current worth could be 500m (€745m), based on funds under management of 21bn. This could put an initial value on the incentives of 60m. Analysts said this could equate to 1m per participant, although a Newton spokesman refused to discuss numbers.
Bob Doll, president of Merrill Lynch Investment Managers, which has also been plagued by defections, is moving forward with the introduction of a profit-sharing scheme. Barclays Global Investors recently introduced an equity incentive package.
Schroders has had an equity incentive package for years, which provides managers with an 11% stake. Michael Dobson, Schroders chief executive, expects the proportion of shares owned by his managers to rise further.
Firms that have suffered significant defections in recent weeks include Deutsche Bank, Hermes and Investec, which do not make equity in their fund divisions available to managers.
The Newton package will grant phantom equity to key staff over four years. It will be offered in addition to cash bonuses struck on a share of operating income and performance fee revenues. Helena Morrissey, Newton chief executive, said: 'We wanted to provide substantial incentives to present and potential future contributors to Newton's team-based investment process.'
The remuneration debate has gone on at Newton for years. In 2000, several managers complained about the way Mellon deferred bonus payments following its 175m purchase of the 25% of Newton it did not own. This, in addition to controversy over Mellon's management style, went on to trigger the defection of talent. Stewart Newton, Newton's founder, and Charles Richardson, his chief investment officer, ended up leaving Newton to start their own firm, The Real Return.
This year The Real Return, which offers equity incentives to newcomers, has poached Asian specialist managers Ezra Sun and James Herries from Newton.
UK equity managers Clive Beagles and James Lowen also left Newton this year to join JO Hambro Capital Management. Theresa Egan, a high-yield bond manager, defected to Old Mutual Asset Managers.
Audrey Lowrie, a global equity specialist, has now decided to emigrate to Canada for personal reasons. Multi-asset manager Stuart Eaton, who looks after several clients, has accepted a redundancy package.
Consultants are worried about the level of departures. They are particularly surprised by Eaton's departure, given the size of his client list.
Fears of defections have recently been restricting Newton's business growth, despite its production of a string of decent performance numbers.
One consultant said: 'High-quality specialist managers are in demand. The firm was badly destabilised when Newton and Richardson left. Headhunters seem to have their teeth stuck into it.'
The consultant reserved judgement on the new phantom equity package, but agreed it was clearly a move in the right direction.
Consultants are increasingly keen to see owners of fund management groups offer equity-related packages to managers. One said: 'Equity incentives become particularly important where specialist, high-risk managers are involved.'
