Nick Train was the only star fund manager in an analysis of seven who went out on their own that delivered better performance when he established his own asset management firm, according to a report by AJ Bell. In contrast, all others assessed were unable to maintain the annual alpha that had landed them star fund manager status at their previous employers.
Despite faltering performance as they set out on their own, Companies House records show the millions of pounds some of these boutique stars took home.
Dividends and pay at boutique fund firms
Neil Woodford, who suffered the worst hit to annual alpha in the AJ Bell analysis, and his business partner Craig Newman were sitting pretty at Woodford Investment Management. Of the £41.7m profits they received in the year ended 31 March 2018, a dividend of £36.5m was paid to Woodford Capital, which is 65% owned by Woodford and 35% by chief executive Craig Newman.
The duo have paid themselves approximately £100m total in the four financial years since the company launched, according to Companies House.
Woodford Investment Management would not comment on the specifics of the directors’ remuneration.
A spokesperson for the company said: “Profits are transferred into Woodford Capital to enable Woodford Investment to invest excess balance sheet cash of the limited company. The money is reinvested into the Woodford funds, such as Woodford Patient Capital Trust, used to make charitable donations, as well as providing an income for the directors.”
Meanhile Nick Train and the four directors of his eponymous boutique bagged £19.1m between them in the year ended 31 January 2019. A bumper year in which profits rose 46% banked the highest earning director at Lindsell Train £8.2m.
There is no public record for how much these managers were paid at their previous employers. But a banking and asset management salary survey compiled by consultancy Michael Page showed that portfolio managers at listed City fund groups with 10 plus years of experience earn a base salary between £100k to £150k on average, plus an additional 50% to 100% in bonuses.
One star manager told Portfolio Adviser founders and partners in boutiques put up tens of millions in risk capital whereas for big listed managers like Standard Life Aberdeen shareholders have provided £9bn of shareholders’ funds which its employed managers rely on for their operations, so the employee/founder comparison is hardly valid.
Motivations to set up a funds boutique
There are lots of reasons why portfolio managers might decide to set up their own businesses, says Seven Investment Management senior portfolio manager Peter Sleep, and a bigger paycheck is certainly one of them.
“Some are motivated by money, certainly, some are more motivated by the challenge of owning their own business and others want to escape from the large company environment with the oversight and office politics that goes with it.”
Richard Pease left Janus Henderson on less than amicable terms to launch his own firm Crux Asset Management in 2015. He took his ex-employer to court for breach of contract for failing to pay him £2.7m of outstanding management fees.
In 2018 the highest paid director at Crux earned £1.9m, while the five directors earned a total of £4.5m.
Sleep says some managers might also be tempted to leave bigger businesses because they are dissatisfied with the way profits from performance are distributed.
He notes that while Woodford was running circa £30bn at his former employer Invesco, if he were earning 0.75% in annual fees, he would have been collecting £225m.
“I am sure Woodford was paid well at Invesco, but I would be surprised if it was as considerable as they amounts he received at WIM.”
Smith and Train the exceptions
Sleep says you can’t open a newspaper without reading about another portfolio manager who is leaving an established fund group to start up their own venture.
This year alone there have been a string of high-profile managers deciding to do just that, including Fidelity’s multi-asset CIO James Bateman, as well as heavyweight European managers from Neptune and Jupiter Rob Burnett and Alexander Darwall.
But Sleep says the reality of boutique management is a variety of outcomes ranging from “insolvencies to comfortably-off OK firms to major successes.”
“The Smiths and Trains are pretty much the exceptions. Woodford has shown that success can be ephemeral.”
Terry Smith did not feature in the AJ Bell analysis, but his £19.1bn Fundsmith Equity fund has returned 383% net of fees since launch in 2010, while Train’s £7.4bn Lindsell Train UK Equity fund has delivered 376% 13 years after it was launched in July 2006. Smith was the highest paid partner at Fundsmith last year earning £12m in 2018.
This point was highlighted in the research from AJ Bell, which pointed to a drop off in performance from some of the industry’s biggest stars like Crux’s Pease and Woodford after they transitioned from listed fund groups to boutique life.
With the exception of Nick Train, every other manager saw their performance dwindle after making the switch, most notably with Woodford, whose average annual alpha on the Woodford Equity Income fund has been -7.24% since launch compared to the 4.27% average annual alpha he delivered at Invesco.
At the helm of the Invesco Income and Invesco High Income funds Woodford delivered over double the returns of the benchmark famously benefiting from avoiding the tech bubble. But his Woodford Equity Income and Income Focus funds have been consistently bottom of the leader boards in the IA UK All Companies and IA UK Equity Income sectors and ranked among the worst funds of the first half this year.
Ex-Schroders trio Julie Dean, Tim Russell and Chris Rice have also delivered weak performance and alpha generation since leaving the FTSE 100 manager to set up Sanditon Asset Management in 2015.
Russell’s long/short UK equities fund was among the top 10 worst funds in H1 this year, losing investors 7.4%. But Rice’s Sanditon European Select strategy has seen performance pick up, topping performance tables in May, the only absolute return fund to do so.
Pease’s European funds have also seen performance improve year-to-date though they fall in the third and fourth quartile of peers in the IA Europe Ex-UK sector over one and three years respectively.
Performance will be variable over time
GBI2 managing director Graham Bentley finds it unsurprising that most of the managers assembled in the AJ Bell study have seen a reversal in performance.
“I think one needs to be careful with data like this,” he says. “We know that fund manager performance is variable when he or she moves from company A to company B. The AJ Bell data supports that, but doesn’t necessarily indicate that there is anything special about performance post setting up a business, versus simply moving from one employer to another.”
Bentley says generally managers move for more money “like the rest of us”. Poorer performing managers are less likely to move and get more money.
“Therefore, given most managers’ performance is variable over time, you’d expect to see examples of weaker performance from a cohort of moved managers with higher earnings.”
Excessive pay not a good look
High Pay Centre director Luke Hildyard said the fact boutique managers are making “vast sums of money, often in spite of unremarkable performance” isn’t a good look for the industry and could be a red flag that governance is lacking.
“It raises the question of whether these funds are delivering value for money and whether or not their governance structures are remotely adequate,” he says.
Hildyard says it is probably more difficult for managers at a major, listed investment firm that is subject to oversight from the board and shareholders to pocket such oversized pay packets than for someone at a smaller boutique.
“In this sense, the egregious sums of money for a job not especially well done, and the contribution they make to societal inequality, are only part of the problem.”