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There’s an inherent conflict between the asset gathering desires of asset managers’ CEOs and preservation of outperformance, Clive Beagles, Senior fund Manager at JO Hambro kicked off his presentation ‘Capacity Matters’ at the Morningstar Investment Conference in London. Beagles said he could cite countless examples of good firms that have been crushed by the weight of their asset inflows.
So how do you get fund managers to focus on performance rather than building assets? This is a tricky problem, Beagles ceded, given that increasing asset growth also increases a manager’s power base, pay (one way or another), and job security to a certain degree, not to mention ego (something that Beagles said generally doesn’t need increasing in the case of most fund managers).
One solution, which Beagles puts forward, would be to limit capacity but introduce a sensibly-constructed performance fee, i.e. if a manager’s fund performs well then they can be rewarded within the existing fund size.
So if you subscribe to this view, what’s the right level at which to limit capacity? It will vary by asset class, market environment and fund manager style, Beagles said. For example, a momentum investor versus a bottom-up stock picker: the former can generally run a bit more money, though whether they can continue to outperform year after year his something Beagles questions.
How did JO Hambro set the level at which to limit their fund capacity? Originally it was set at £750 million in November 2004 versus a Newton Equity Income product of £2.2 billion. JO Hambro wanted to keep the stock rejection rate high at 70%-75%, he said, while investing in a realistic universe of 200 stocks (with a market cap over £150 million and yield greater than the market) and they didn’t want to earn more than 4%-5% of an individual company, with an average holding of 2-2.5 years.
