Index Managers Gain New Respect
September 13, 1999
Think of it as the mutual fund industry's version of Revenge of the Nerds.
Index and quantitative fund managers by and large had been the poor cousins among portfolio managers. Known for their devotion to obscure mathematical formulas and indexes rather than financial statement analysis, index fund managers and quants, as they are sometimes known, historically have earned less than their counterparts who actively manage funds, according to executive recruiters and fund industry observers. That may be changing.
This summer, the growing popularity of index investing has caused a boomlet in demand for index and quantitative-oriented managers. That demand is pushing up the compensation that those managers receive because index and quantitative managers are relatively scarce, said executive recruiters and industry observers.
"The supply is not there," said Lawrence Liberman, managing director of the Orion Group, an executive recruiting firm in Princeton, N.J. "There are not that many index fund managers."
That appears to have been the case in a series of personnel moves during the past two months. In July, Merrill Lynch & Co. of New York hired away a team of five money managers from Deutsche Asset Management of New York to form Merrill Lynch Quantitative Advisors. Quantitative Advisors plans to introduce new enhanced index funds as part of an effort to expand Merrill's index fund offerings.
Then, on Sept. 2, Deutsche executives announced that their firm had hired away a group of eight quantitative executives, including the firm's chief investment officer for global active quantitative strategies, from State Street Global Advisors, or SSgA, of Boston. Top managers are said to have been offered millions of dollars in the deal. Median compensation for an equity fund manager at a mutual fund company this year is $299,000, according to a survey that the Association for Investment Management of Charlottesville, Va. and Russell Reynolds Associates of New York made public July 20. A Deutsche spokesperson did not return calls seeking comment.
Only a handful of firms specialize in index and enhanced index investing, a fact which is contributing to the shortage of portfolio managers who adhere to index and quantitative styles, say fund executives, consultants and recruiters. The Vanguard Group of Malvern, Pa., Dimensional Fund Advisors of Santa Monica, Calif., Charles Schwab & Co. of San Francisco and Barclays Global Investors of San Francisco are other firms which recruiters and consultants single out as prominent in index and quantitative investing besides SSgA, Deutsche and Merrill.
Barclays is currently planning to add to its staff of approximately 100 employees, including portfolio managers, analysts and researchers, who work in Barclays' enhanced index funds group, said Tom Taggart, a spokesperson for the firm. Barclays currently has about 25 percent of its $687 billion in assets in enhanced index funds and expects demand for those products to increase, Taggart said.
"It's a growing business for us," Taggart said. "It's really investor driven."
Demand certainly has increased during the past five years. Financial Research Corp. of Boston, a mutual fund consulting and tracking firm, said the market share of domestic index and enhanced index funds has grown from 3.8 percent as of Dec. 31, 1994 to 10.8 percent of the nearly $298 billion domestic equity market as of July 31. As of Dec. 31, the index and enhanced index fund categories had a 9.6 percent market share, FRC reports.
The increase in assets has made it possible for index and enhanced index fund firms to increase the compensation they pay managers, said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I. Index funds, because of their low cost, have narrower profit margins, making it more difficult to pay higher salaries, Bobroff said. As assets grow, index fund firms can increase compensation for managers, Bobroff said.
The recent job switching may bring increased attention to the importance of non-compete agreements and patents, too. Because there are only a handful of players in the index and quantitative world, SSgA is likely to have had agreements that prohibited at least some of its departing employees from joining a competitor to do the same work they performed at SSgA, some industry observers said. Liz Kennedy, a spokesperson for SSgA, declined to comment.
Deutsche's hiring of one SSgA executive - Dean S. Barr - could present a further twist. Barr, who was chief investment officer of global active quantitative strategies at SSgA, had helped develop a quantitative investment process on which SSgA, through an affiliate, received a patent last year. (MFMN 1/11/99)
SSgA retains the right to the patent, Bobroff said. SSgA and Deutsche could find themselves in litigation should Barr try to replicate that patented investment process too closely at Deutsche, Bobroff said.