Investors Can Receive Best Returns With Smallest Asset Managers, Research Shows

Global equities managers with smaller assets and fewer staff members receive the greatest excess returns, new research shows; at least one large US pension fund is investing accordingly.

(July 29, 2011) – New research from Russell Investments shows that global equities managers with fewer staff and funds under management outperform larger management teams in charge of more capital, according to Top1000Funds.

The research was gathered from 233 global equities managers that are part of Russell’s Global Equities Universe. According to Peter Gunning, Russell’s global chief investment officer, the findings are consistent with a long-established hypothesis that asset managers with fewer assets perform better than those with larger assets.

Even before the research was revealed, pension funds took stock in the hypothesis: DowJones’ Financial News reported that the California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, was continuing an initiative first started in 2000 to invest in small asset managers that the fund thought had promising growth prospects. In April, the pension giant acquired a 17.5% stake in boutique French asset manager Tobam, a former Lehman Brothers affiliate.

The research from Russell looked at average five-year annualized returns for managers, broken down by number of staff and by asset size. Returns for managers with five of fewer staff members averaged 2.58% better than Russell’s Global Large Cap Developed universe as a whole, while funds with six to ten staffers achieved 1.77% excess return. Meanwhile, funds with more than 30 staff members had returns 0.03% lower than the universe as a whole.

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A similar trend occurs when asset managers are broken down by asset size. Those who manage under $2 billion experienced 1.96% excess return and those who manage between $2 and $5 billion had excess returns of 1.21%. Funds managing over $5 billion had negative excess return that increased in magnitude when funds topped $15 billion.

Gunning attributed the trends to newer – and thereby smaller – funds’ more aggressive investment as they try to establish success. Paradoxically, once funds find success and have more investors, they become more concerned about risk exposure and the high returns that attracted investors often disappear.

“When you actually look at many asset managers when they first set up shop…in the main there is this window of opportunity where these managers typically perform very well relative to their peers,” Gunning said. “As the firm matures, maybe it attracts more assets, maybe the principals are beginning to become a little more concerned about ongoing business risk rather than investment risk, so we often see a period where these boutique managers start to move in-line with their peers.”

To contact the aiCIO editor of this story: Justin Mundt at <a href='mailto:jmundt@assetinternational.com'>jmundt@assetinternational.com</a>

Survey Shows Companies 'Moderately Concerned' About Comparing Pay, Performance

With the implementation of Dodd-Frank act’s provision on executive pay and corporate performance approaching, a majority of companies surveyed by Towers Watson are moderately concerned about having to show the relationship between pay and performance.

(July 29, 2011) — A new survey by Towers Watson reveals that the first-ever say-on-pay proxy season had relatively little immediate impact on most public corporations in the United States.

However, the vast majority of companies are either planning or considering making changes to their executive pay-setting process and overall preparations for next year’s proxy season.

The heightened attention over say-on-pay among shareholders reflects their effort to obtain greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

“Most companies are breathing a sigh of relief now that the proxy season is over,” Doug Friske, global head of Towers Watson’s Executive Compensation consulting practice, said in a statement. “The same, however, can’t be said for many companies that received an ‘against’ recommendation from proxy advisory firms or failed to win the support of at least 80% of the shareholder votes cast on their say-on-pay resolutions. The survey findings, along with our consulting experience, suggest that these companies are taking shareholder views quite seriously and plan to respond in some way.”

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Todd Manas, a director in Towers Watson’s Executive Compensation practice in New York, added: “We believe companies need to start thinking now in a proactive way about their strategy for next year’s proxy season. Even companies that won shareholder approval this year can’t assume they’ll receive a similar outcome next year. Confirming that a strong pay-for-performance linkage exists, reaching out to shareholders and improving their overall communication about how their company pays for performance will be critical, especially as advisory firms use their own measures for how executive pay ties to company performance.”

Furthermore, Towers Watson’s survey showed that most employers (64%) are only moderately concerned about having to show the relationship between executive pay and corporate performance, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In January, the Securities and Exchange Commission (SEC) adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages.The regulator plans to propose and finalize implementation rules for the Dodd-Frank act’s provision on executive pay and corporate performance sometime between August and December.

Under the agency’s authority granted under the Dodd-Frank Act, the regulator’s commissioners voted 3-2 to enact a say-on-pay measure, making compensation plans subject to nonbinding shareholder votes as often as once a year.

The SEC amended the rule proposed in October 2010 to “specify that a say-on-pay vote is required at least once every three years, beginning with the first annual shareholders’ meeting taking place on or after January 21.” According to the SEC, companies also are required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Furthermore, the ruling will improve disclosure on so-called golden parachute payments for executives, which they get when their companies are acquired by others in mergers.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742