Hence, it is time to turn the spotlight on the current 'talent famine' among investment professionals - equity, fixed income and analysts - around the world.

For example, three in five of them jumped ship in the UK in 2006, according to the latest annual survey by Investment Solutions, a London based research company. The numbers are higher in America and slightly lower in Continental Europe. Worldwide, there is no lull in the war for talent; or so the headhunters tell us.

Their explanations are self-serving and innocently naïve. They want us to believe that clients want alpha performance. Hence, hedge funds are vacuum cleaning the scarce talent. In response, mainstream fund managers are launching high alpha and specialist liability-driven products in response to changing client needs.

All such explanations 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. If only reality were that simple.

"In part, these figures reflect a catch up after the bear market. But they also reflect the fact that fund managers are now being forced to address issues around under-performance. A staff turnover rate of around 10% is about right. It helps to revitalise your gene pool." says Alan Brown, Head of Investment at Schroder Investment Management Ltd.

At a time when market-driven beta remains the predominant source of returns for most investors, the implied scale of staff poaching conjures up an image of a vast drove of refugees fleeing reality. And who can blame them if their employers persist in deluding themselves that they are attracting 'stars' in the war for talent.

The delusion is nothing more than triumph of hope over experience. It rests on the view that fill your front office with people with a generalised propensity to do well and, hey presto, they will out-perform. The fact that their track-record suggests otherwise is neither here nor there: this time, it is going to be different.

What matters, so the argument runs, is where they have been and who they are, not what they have achieved. This puts talented investment professionals in the same category as elitist aristocrats.

Talent is far more than that. It is the ability to win consistently, using either rational methods or personal intuition or both. It relies on self motivated creativity to solve bigger challenges, as implied by Mr Gates. Even in the hedge funds sector, only 4% of out-performance is attributed to skills, according to Edhec Risk and Asset Management Research Centre in France. For most investment strategies, alpha is a zero sum game: for every winner there is a loser, as in a game of poker.

In fund management, the difference between skill and luck is the consistency of good performance, even though some sceptics believe that it is possible to have a long lucky streak, thanks to the laws of randomness. Investment professionals accept randomness in their failure, not success. It is thus hard for us to accept that even a significant minority of today's intrepid job hoppers are necessarily 'talented' individuals. Some are, most are not. Of course, more can be nurtured in that role.

"Developing and retaining talented professionals requires an infrastructure built around empowerment and decision leverage. The best professionals want a system that maximises their creative and tactical talents with like-minded professionals who share the same goals and ideals. Do that well and superior performance and business economics will follow." says Karl Dasher, global CIO at SEI.

Without a nurturing culture, employers are unwittingly setting up their new hires to fail. After all, talent has always been scarce in the upper decile. Only a tiny minority have been able to out-perform year after year. As the market is becoming more transparent between alpha and beta, the difference between success and failure is now all too obvious, according to the latest study sponsored by T. Rowe Price and Citigroup*.

Yet, fund managers feel obliged to parade their new hires as the front line troops in hot pursuit of absolute returns. They have to show their clients that they are re-engineering their businesses and importing fresh blood in order to enhance the credibility of their proposition in the face of rapid incursions by hedge funds. But sooner or later, high staff turnover rates will show up to be what they are: an expensive window dressing exercise.

"There are a lot of unrealistic expectations and unrealistic promises made. People get sucked into agreeing to try to deliver what investors want to believe rather than what is achievable; hence the recent rise in mandates with very aggressive alpha targets" says Nigel Williams, Europe & Asia (ex-Japan) CEO at Barclays Global Investors.

The current staff 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.

Within each set, different elements appeal to different people. However, many of the individual elements within the three sets have been ignored, as fund businesses have resorted to savage cost cuttings in the past four years. As demotivation has grown, high turnover has returned with a vengeance.

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 intellectual intensity out of them" adds Keith Skeoch, CEO of Standard Life Investments.

In the aftermath of the bear market, demotivation amongst most investment professionals has been rife because 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 dysfunctional tensions. When off-loading costs or businesses quickly, unintended consequences have abounded, exposing the lack of the required leadership skills.

With the growth of meritocratic incentives, mediocrity in the front office is no longer tolerated. As old entitlements, unrelated to personal merit, have been withdrawn, investment professionals 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.

Download the original published article (in Swedish)