Funds management can be tough work. Often, it demands intelligence, discipline, resilience – some of humanity’s admirable qualities – and its own version of hard yakka: ‘sweat equity’. Society is supposed to benefit from this as, over time, institutional managers discipline companies. Without them, “no-one’s out there even thinking about what the proper price of a security is,” says Cliff Asness, founder of AQR Capital Management. “And just because we’re occasionally susceptible to mass delusion, it doesn’t mean we don’t have a far more efficient economy because someone is in there, day-in, day-out, thinking about how securities should be priced in relative and absolute senses.” Substantiated by capital flows, institutional managers’ views are an essential input into functioning free-market economies.
In Australia, funds management comprises a big chunk of the 7.5 per cent contribution to national GDP made by the financial services sector. Its symbiotic bind with our $1.4 trillion superannuation system means it’s integrated into Australian lives. The last few decades have rewarded managers – including Asness – immensely well for their work. Six-figure pay is what salary surveys tell us is the norm, and it’s difficult to avoid the tales of largesse wafting from the industry. A lot of managers are talented and work hard: but when their pay is a multiple of what an intensive care health worker earns, it doesn’t seem right.
I’m aware that some of these big pay packets are put towards philanthropy. I’m also aware of the charity fundraising pledges made by companies at conference dinners. However, it’s unquestionable that the 1982–2000 bull market brought windfall gains to the industry, and some of them were made easily. Asness agrees: “A 20- year bull market will lead to at least some confusion over brains versus that bull market, and too many rewards going to the middle-men and not the end users.” Given the intense competition among funds managers, investment fees should be lower – but they’re not – and the sector has likely absorbed more than its rightful share of talented people. Compared to what society has enabled the funds management industry to gain, society, in aggregate, has not got the best deal in return.