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Fund manager musical chairs

Standard and Poor's says the game of musical chairs being played by fund managers in Australia may impact on returns.

Thursday, September 20th 2007, 6:24AM
The trickle of senior Australian-equities fund managers leaving their positions in the first quarter of 2007 has become a flood; reaching unprecedented heights by the end of July, according to Standard & Poor's Fund Services.

Moreover, the game of 'musical chairs' has the potential to affect the now gargantuan pool of assets under management, and that should be of concern to all equities-market participants, from retail shareholders to financial planners to chief investment officers.

Within the universe of 38 Australian-equity managers rated by S&P, some 34 senior staff departures have occurred over the course of year-to-date 2007, with 14 out of 38-or 37% of rated fund managers experiencing turnover at the senior level.

"At a time when the search for alpha has focused significant attention on 'key person' investment managers, it's critical to understand what's fuelling the game of musical chairs. All market participants need to know how to react when fund managers suddenly dart to a new and different chair," S&P Australian-equity sector head Marcus Hanel said.

Although most firms will have a succession plan in place, its effectiveness will be based on the depth of the team.

For investors, the rating of the fund can provide a very effective guide. "A significant move may or may not have an impact on the rating of the fund depending on the succession plan, the skill and experience of the replacement relative to those of the departee, and the swiftness with which the right person is placed into the vacant position," Hanel says.

He says the data tells an interesting story about what is fuelling the moves. Of the 34 departures at senior level, 12 went to mainstream firms, nine dropped off the radar, and 13 went to boutique fund-management firms.

Strong equity-market returns and large fund inflows have increased the attractiveness of smaller, more specialised investment-management operations, he says.

"Mainstream managers are, however, fighting back in the war for talent, with some institutions, such as Perennial and BT, implementing boutique-style remuneration structures."

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