12 December 2005

"Behind the jobs merry-go-round"

By AMIN RAJAN

Job hopping is accelerating, according to the latest survey from Investment Solutions, a multi-manager investment firm. It shows that more than two in three investment professionals - equity, fixed income and analysts alike - have jumped ship in the UK in the past three years. The US figure is no different, if anecdotes are anything to go by.

Two plausible reasons are offered. The hedge funds are vacuum cleaning the scarce talent. Mainstream fund managers, too, are launching high alpha and specialist liability-driven products in response to changing client needs.

Both have a common thread: in the brave new world of absolute returns, clients will no longer tolerate high fees if the actives continue to be out-performed by the passives; so, fix the skills and the numbers would follow. However, this view is far too simplistic.

Even in the hedge funds sector, only 4 per cent of out-performance is attributed to skills, according to Edhec Risk and Asset Management Research Centre in France. Even if the number is higher, it is hard to see how a vast drove of people moving from one job to another can conjure up anything other than a mirage. After all, for most investment strategies, alpha is a zero sum game: for every winner there is a loser, as in a game of poker.

"Talent has always been scarce in the upper decile. Very few managers can out-perform year after year. As the market is becoming more transparent between alpha and beta, it is vital to persuade clients to see if a manager can generate alpha over a whole cycle. The issue is whether you want to build a great company or celebrate ephemeral success," says Tom Hughes, president of the Clinton Group, a New York-based hedge fund group.

The current exodus has far more to do with the perceived failure to deliver three sets of benefits that are vital in attracting, retaining and getting the best out of talented managers (see figure):

* An employer brand that generates a high degree of corporate pride

* An interesting job that stimulates personal commitment

* A balance of hard and soft incentives.

Different elements appeal to different people. However, many of the individual elements within the three groups have been ignored as fund managers have resorted to savage cost-cutting in the past four years. As demotivation has grown, high turnover has returned with a vengeance.

"People come to work for different reasons. Intellectual challenge and money are more important than status. Young people also want career progression since their street value shoots up after three years' experience," says Alan Brown, head of investment at Schroders.

Mutual misunderstanding has been all too evident: bosses have seen their investment professionals as greedy arrogant individuals with a highly inflated sense of self worth; in turn, professionals have seen their bosses as glorified bean counters detached from the heart beat of the investment craft.

For both groups, parting of the ways may mean no more than a futile chase for the next rainbow unless the underlying causes are tackled.

"My role is to ensure that people thrive in the environment in which they work. You have to take strains and stresses away from them so that they can excel at what they are really good at. They have to feel that they are in charge of their own destiny, if you want huge intensity out of them," says Keith Skeoch, chief executive of Standard Life Investments.

In the aftermath of the bear market, demotivation among most investment professionals has been rife for two reasons.

First, few of their top bosses have been experienced in the art of change management. So, the transition to a new business model has often been fraught with tensions. When off-loading costs or businesses quickly, unintended consequences have abounded, exposing the lack of the required leadership skills.

As one CIO observed: "If you put any of our CEOs in front of a team of portfolio managers, they will be torn to shreds. These people are trained sceptics: an art they use to a destructive perfection when it comes to their own bosses."

The second reason relates to pay. At the start of the bear market, about 20 per cent of mainstream fund managers around the world linked annual bonus to performance.

For the rest, funds under management was the main driver, ensuring that bonus was an arithmetical certainty in a rising market. However, by 2004, the figure had shot up to 38 per cent and will continue to rise, according to a Create-KPMG study*.

With the ascendancy of meritocratic rewards, mediocrity in the front office is no longer tolerated. As old entitlements unrelated to personal merit have been withdrawn, people are left with two bruising choices: shape up or ship out.

At best, job-hopping means that new ways of thinking are emerging alongside the old ways of working. At worst, it means that the end client picks up the tab with no benefits. Currently, it is tilted towards the latter.

*contact amin.rajan@create-research.co.uk for a copyProfessor Amin Rajan is the CEO of Create, a research consultancy.

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