Monday, 3 September 2012
Sacking the manager not always wise
Sophia Grene brings up a puzzle: either the principle of pay-for-performance is rubbish, or the fund manager role is unnecessary.
First, if lack of or under performance is defined as the relative fund returns compared to peers in a short period of time, then by keeping underperformers in the hope they achieve comparatively better results may imply that an over-performing manager inevitably gets a poor result (being beaten by a low-return colleague) hence it does not make sense to keep the good managers! The conclusion is don't keep the people who made most money and don't fire the losers. Quite counterintuitive.
Secondly if the cyclicity of the industry is the poor performer's best defence, and it makes it impossible to achieve any sustained good performance and all is in the hands of mighty Hazard, then why would a fund need a manager? The solution would be either to pay managers who beat the cycles or devise a system which is less affected by those as a whole, and compare the fund managers results in a world without cyclicity excuses.
I am not too excited by people who make a lot of money and the biggest risk they have when they lose other people's money is they make slightly less money for themselves. And the really unlucky very few temporarily lose their jobs.