You are using an older browser version. Please use a supported version for the best MSN experience.

What makes a fund manager quit his job?

LiveMint logoLiveMint 10-05-2017 Kayezad E. Adajania

When Rs19 trillion money is at stake, what goes inside your fund manager’s mind is extremely important. His expertise apart, a happy fund manager bodes well for the money that he is managing. However, with most fund managers earning more than Rs1 crore a year, is it just money that motivates them to do their job? Rs1 crore is not a small amount, and yet, in the last 2 years, at least nine fund managers have left the mutual funds industry, according to a data from Morningstar, a mutual fund research firm.

The most notable exit was of Kenneth Andrade, a star mutual fund manager who used to head investments at IDFC Asset Management Co. Ltd. He left after spending more than 10 years at the fund house. Under Andrade’s watch, IDFC Premier Equity Fund (IPEF)—the mutual fund scheme he co-managed—returned 21.73% on a compounded basis, as opposed to 11.09% by the S&P BSE 500, its benchmark index. Andrade now heads a portfolio management service firm called Old Bridge Capital Management Pvt. Ltd; which was founded by him.

But why do some fund managers prefer managing money for only a select few, such as by setting up their own portfolio management services firm? Is it for the lure of money? Or is it the joy of setting up something of their own? Or does a long career in a mutual fund company burn them out?

We spoke to few fund managers to know what really drives them to be in this space. We also spoke to fund managers in the mutual fund industry to know what motivates them to stay on in the industry.

All managers agreed to speak to Mint off-record, given the sensitivity of the issue.

Fund managers dread performance evaluation during falling or volatile markets, especially when they mostly invest in companies to make money in the long run. Every fund manager has a few bad days in office, but at times these bad days can bite harder because of the excessive competition in the industry. “Mutual funds disclose the net asset values (NAVs) of all schemes on a daily basis. Therefore, we get compared to our peers on a daily basis, despite mutual funds being long-term products,” said a fund manager. In 2014, Andrade’s IPEF had returned 59%, while the S&P BSE Mid Small Cap went up by 54%, on the back of the new government led by prime minister Narendra Modi at the centre.

It was not a bad performance, but IPEF didn’t look as good as many other mid-cap funds did at the time. “Distributors and advisers are known to ask questions focusing on short-term performance, more than long-term and Andrade always despised that,” said a senior sales and marketing official of the fund house, who was privy to Andrade’s thinking.

Andrade, however, told Mint that he was not under any pressure to justify his performance at the time.

However, there can be other stressers for many. A fund house’s profits grow only when its assets grow. Here’s where a fund manager can run afoul with his own firm. Many fund managers don’t like taking in more money in rising markets when valuations touch dizzying heights. But if an equity scheme, for instance, grows from Rs2,000 crore to say, Rs10,000 crore, the fund house’s management fee earned goes up from Rs10 crore to Rs50 crore. The fund charges 50 basis points as management fee. One basis point is one-hundredth of a percentage point.

Fund managers are expected to sound ‘bullish’ to ensure that money keeps coming in to the schemes. A fund manager of a mid-sized company told us that he came “under the heat” from management a few years ago when, in an interview he gave to a business newspaper, he said he expected more corrections in the market in the near future.

While some fund managers may have moved away from fund houses to providing services to a smaller number of clients, a large-sized asset management company (AMC) can be a big advantage for fund manager in some cases, said the first fund manager we spoke to, citing the example of Prashant Jain, chief investment officer, HDFC Asset Management Co. Ltd.

Between 2011 and 2015, two of his equity funds, HDFC Top 200 Fund and HDFC Equity Fund figured in the bottom quintiles in 2 years. Both schemes underperformed their benchmark indices in 2015. “If he had been working for a small fund house, his critics would have been many more. But because his long-term performance was really good and HDFC AMC is a big brand, a couple of bad years here or there don’t do much harm,” the fund manager said. “Not everyone is that lucky,” he added.

Fund managers value their independence, and they tend to resent any interference in the way they manage their funds. A fund manager of a mid-sized mutual fund house revealed to Mint that after the company got a new chief executive officer (CEO) some time back, things started to ‘heat up’ and even short-term blips in the schemes’ performance started being questioned “without understanding the fund management team’s philosophy.” There was even an advice to vote at a shareholder’s meeting in particular manner in certain cases, he added. Many fund managers resent such treatment.

But it’s not all push. Some fund managers leave their jobs to start something of their own and pursue entrepreneurial aspirations.

Nilesh Shah, before founding Envision Capital, a portfolio management service that specializes in publicly listed growth-oriented companies, headed the team of equity fund managers at Kotak Mahindra Asset Management Co. Ltd, which he left in 2007. “In a portfolio management service, fund managers can create strategies (such as a ‘deep value’ oriented or a differentiated strategies, which call for long holding periods) and then see them through for a really long time, without having to worry about short-term volatility. A mutual fund format may not permit such products,” said Shah.

A portfolio management service manager finds it easier to manage investors’ expectations. “If a portfolio management service manager sees that a prospective investor doesn’t have the risk appetite to match that of the scheme, the manager can politely refuse,” says a third fund manager. A mutual fund doesn’t allow such liberties.

The managers of a portfolio management services, who make it big, also earn big. If a portfolio management service collects Rs1,000 crore, a 2% fee brings in Rs20 crore, and much of it goes into his pocket, even after accounting for his staff and operations, which are usually modest. But these managers also earn performance fees of up to 20% of profits earned over and above a hurdle rate—which is a pre-decided rate. “But he should have the confidence of raising that much money and that many investors to back his strategy,” said a fourth fund manager.

Let’s try to get a sense of how much money we are talking about, in terms of mutual fund operations. Assume that a fund house has assets of around Rs40,000 crore, of which Rs15,000 crore are in equity and Rs25,000 crore in fixed income. Also assume that the equity assets—after all the distribution and operating expenses—collect 45 basis points as the asset management fee and fixed income assets rake in 10 basis points, then a fund house stands to collect around Rs2,500 crore. A fund house of this size would have around 300 employees, and the top fund managers could be earning Rs4 crore, at the most.

It is also not easy to set up another fund house.

For starters, the entry barriers for this are very high. To set up an asset management company, they would first have to find a sponsor company, one which should be able to set aside at least Rs50 crore to set up an AMC, as well as have a track record of profitability of its own. For an individual fund manager, these two barriers alone can prove prohibitive. Therefore, they take the more practical route of founding a portfolio management firm.

But many a times, even the lure of big money and the freedom to manage the portfolio without having to report to a boss may not be enough to entice the big boys. “There is a safety net in getting a cheque at the end of every month. A fund house’s sales and marketing team can shield you from investors when our strategies don’t work at times. That shield is not there in a portfolio management firm,” says the head of equities of a mid-sized fund house .

A former mutual fund manager, who is about to launch his first portfolio management service, told us of the pains that he is going through to set up his own firm. “I have to set up a compliance team, a back office, hire analysts and ensure their and my philosophies are in sync; all this takes time and I also have to manage investments. In a portfolio management service company, you can’t just limit your activities to managing the clients’ money,” he said.

Many fund managers also don’t like to move beyond the industry—and their own fund house—because they want to build and establish a good track record. “Continuity in one place allows you to do so,” says the first fund manager. When he joined his current fund house in 2011, he had already changed three jobs since 2008, due to things not quite working out, he says. “It is essential for someone in my shoes to stay in one place and build a track record. Sometimes that works better than, say, leaving and starting a portfolio management service company of my own. Prashant Jain’s reputation has come because he has built a 20-year track record by staying with the same fund house,” he adds.

And yet, there are those who are willing to leave for greener pastures, as they see them. Traditionally, salaries are not discussed publicly in an organisation, as it may lead to frayed feelings among colleagues. Therefore, with fund manager salaries now available publicly, the Indian mutual funds industry could continue to see a game of musical chairs. And if the industry continues to consolidate, we could also see some casualties in terms of fund managers moving out of the industry altogether.

The ever-growing portfolio management service industry (its assets under management grew from Rs5.85 trillion at the end of December 2012 to Rs11.75 trillion at end-December 2016) seems to be becoming more alluring with every passing day.

More From LiveMint

image beaconimage beaconimage beacon