16th February 2004

"Getting the best out of Einsteins"

By AMIN RAJAN

In the sixth in his series on solving problems in fund management, Amin Rajan emphasises the importance of motivating talent. Today's low nominal return environment has thrown up its own paradox for fund managers: they can't afford "stars", but they need them more than ever.

A combination of high costs and low returns means that few firms can afford to pay top dollar salaries to those making the key decisions on asset allocation and stock selection.

Yet, to obtain new mandates or retain existing ones, many firms desperately need the good performance generated by fund managers - known as alpha. After all, the "product" is performance. Successful fund managers need analytical skills to generate insights from an unbelievably large volume of data. But they also need to know when to act.

As Roger Smith, managing director of Greenwich Associates, says: "This 'gut factor' separates the stars from the journeymen. The key is to identify people who have it and then create a work environment - and a career track - in which they can thrive. This is what Capital International has done so well."

For Richard Wohanka, chief executive of Fortis Investments, part of the Belgo-Dutch financial group, the right environment is about creating a virtuous cycle of three 'A's: autonomy, alpha and accountability, duly backed by meritocratic rewards.

This echoes the received wisdom in Silicon Valley that "the geeks shall inherit the earth".

More fundamentally, creating the right environment is about understanding three traits of talented people.

To start with, they have divided loyalties: their primary loyalty is to their craft, then to their peers and then to their firms. Secondly, they have deep technical knowledge, driven by restless curiosity, fascinated by novelty and unfettered by traditional norms. Finally, they have strong egos based on excessive individualism and a high sense of self-worth that makes them intrepid job hoppers.

What does it take to motivate them?

Successful fund houses like Wellington and MAN Group appear to follow Einstein's famous equation: E=MC, where E stands for environment, M for management and C for communication. As a general rule, talented people prefer light-touch management and a heavy dose of open, honest communication.

Of course, compensation matters too; but arguably not as much as peer recognition. They are more interested in managing money than people. They work best in small teams with minimal bureaucracy: too many of them working together usually results in chaos, debates and low performance.

Above all, they value two things: autonomy and space within wide parameters of control; and a boss they admire.

They are not hero worshippers. Yet they show remarkable deference towards those who help them achieve their goals. They prefer "nuts and bolts" leadership above visionary rhetoric. They are inspired by a boss who builds trust, shows respect for others and matches deeds with words.

Every industry has its own breed of Einsteins - fund management is no exception. The increasing diversity and complexity of any business requires a cadre of people who excel at their craft, like a premier league football team.

The issue is not whether to have them, but how to deploy them. The media persistently confuses the symptoms with the cause. More often than not, the problems come not from the stars but from those who lead them - the executives, most of whom have got to the top on the back of their technical credentials and who often have little experience of motivating people across different functions. Blame culture evolves then as an unintended consequence.

A lot more effort is now going into developing business leaders than 10 years ago. But two lessons have yet to be learnt within the fund management industry.

It has to take a leaf out of the football industry's book. The beautiful game's history is littered with brilliant players who, it was assumed, would make great managers but who ended up leading their teams into obscurity.

Yet, in recent years, some great football leaders have emerged who were mediocre players in their youth - such as Sir Alex Ferguson, Arse`ne Wenger and Gerard Houllier. Zinadine Zidane plays football so naturally that he hardly needs to think about it, but he may not have the skills to be a good manager when he stops playing. It should be recognised that great fund managers do not necessarily make great leaders.

Second, motivating high performers means running with the grain of human nature. David Varney, chairman of MmO, the mobile phone provider, remarked that one invaluable lesson he learnt at Shell, where he served as a director, was this: "If I, myself, set the performance targets, they will always be too low. But when the targets are set by motivated employees, they will not only be significantly higher, but the employees themselves will find more ingenious and satisfying solutions than I could have ever devised."

Amin Rajan is CEO of CREATE, a research consultancy specialising in new business models in financial services: amin.rajan@create- research.co.uk.