NEW YORK - Demand for U.S. equity portfolio managers slowed for the first time in a decade as money management companies hunkered down and tried to control costs while assets under management plunged.
The 2001 Recruiting Trends Report by recruiters Russell Reynolds Associates, New York, painted a very different picture from the previous year, when the report noted total compensation packages were "beyond historic rates."
Russell Reynolds' 20 global money management recruiters reported this year that recruitment demand has been "substantially reduced."
Compensation levels also are expected to be somewhat lower than in 2000, said Debra Brown, managing director and partner. Ms. Brown said compensation levels in 2000 were so unusual, in fact, that she anticipates that many in the industry will look back to 1999 for a truer comparison.
Demand for large-capitalization growth portfolio managers, in particular, was weak in light of poor growth stock performance and a market correction, according to the report's authors. While layoffs within U.S. money management firms were not broad in 2001, few companies embarked on aggressive growth plans that necessitated widespread hiring.
Positions at dot-com companies were eliminated almost completely, along with searches for people to fill positions connected with e-business applications in investment management, especially in the defined contribution plan market. A "rude awakening" will hit senior e-commerce execs who had substantial salary pops in 2000 when their skill sets were much in demand and hard to find. Russell Reynolds' recruiters predict "many of these same people are considered too expensive by their employers, and we believe that some of them will need to adjust their compensation expectations downward as a result."
M&A slower, too
Industry consolidation through mergers and acquisitions resulted in the first decline in more than a decade in recruitment of technology and operations executives. And when companies did hire, they looked for people as business-minded as they are technically astute, which created competition for exceptionally experienced and talented tech staffers.
The death of dot-coms freed up a large portion of the talent pool on the technology side of the money management business, making personnel upgrades much easier than in the last few years.
There were some pockets of strength, however, said Richard S. Lannaman, the partner in change of the investment management team at Russell Reynolds:
* The number of searches for fixed-income portfolio managers increased. Hedge funds in particular sought analysts and portfolio managers with high-yield and distressed debt expertise. Demand for less exotic fixed-income disciplines also was up from last year. Electronic fixed-income trading platforms picked off experienced portfolio managers and client service people from traditional fixed-income companies.
* Value equity portfolio managers were back in vogue. "But as demand picked up in the value category, a dearth of qualified talent lifted price tags," the report said.
* There was a small surge in hires of small-cap and midcap growth and value portfolio managers, with the plum assignments going to those managers with good three- to five-year track records.
* Search activity was unprecedented for hedge fund portfolio managers and for research and marketing people for companies interested in constructing hedge fund-of-funds programs.
* Hires of risk management professionals also were substantially higher in 2001, but the number of experienced chief risk officers remains small, not only in the United States but also in Europe. European and global money management firms have resorted to recruiting in the United States.
* Companies trying to build up internal research capabilities for security analysis and valuation sought research analysts.
* Technology analysts were hired by opportunistic money managers looking for expertise in navigating that turbulent sector.
Domestic equity slowdown
Part of the reason for the overall slowdown is the decrease in domestic equity searches. Investment consultants throughout the United States reported a drop in the number of domestic equity searches by institutional clients this year, but increased international and global equity hires. That hiring trend by plan sponsors, according to Russell Reynolds recruiters, resulted in increased interest in hiring more international equity staff and in team liftouts by domestic money managers.
International and global equity managers' compensation increased 49% in the last two years, far outpacing that of managers in any other asset class, according to the report. By contrast, compensation for both growth and value domestic equity portfolio managers was up 12% for the same time period.
The scarcity of experienced international and global equity managers required flexibility on the part of acquiring companies, such as permitting the teams or managers to remain in their current location and offering attractive revenue-sharing deals.
Plan sponsor interest in alternative investments also pushed both institutional money management companies and those catering to high-net-worth individuals to add hedge fund or fund-of-funds capabilities, with a focus on portfolio managers with a verifiable and replicable performance history. Russell Reynolds clients required that portfolio managers being considered for hedge fund assignments be able to clearly describe their portfolio construction and management process, the report said, as well as show a willingness to provide some transparency of the investment process.
Institutional investor insistence on performance analysis and attribution also pushed some hedge fund companies to upgrade the quality of their finance, performance attribution and operations teams, adding staff members with higher skills, according to the report.
The U.S. defined contribution market, meanwhile, "has entered a period of profound challenges," the report said, with new sales or plan conversions lagging budget projections by 30% to 50%. Coupled with negative market returns and, thus, lower management fees and dropping assets under management, four of the 20 largest defined contribution plan providers are contemplating either outsourcing or selling their retirement plan business, according to the report. Another four of the top 20 firms now are investment-only providers. The report did not identify the companies. Widespread industry retrenchment led to significantly less recruitment in 2001 among the biggest defined contribution plan providers, although Deutsche Asset Management (Americas), Fidelity Investments, Citistreet, The Vanguard Group of Investment Cos., Putnam Investments and Charles Schwab Co. are still trying to grab market share by any means possible, including recruitment of top talent, the report said.
On the sales and marketing side, institutional marketers and sales executives remained in demand as traditional investment managers tried to enhance their distribution channels. Marketers experienced in high-net worth sales were keenly sought after, as were marketers at hedge funds and private equity managers. Directors of consultant relations positions also were becoming integral to many institutional investment management operations, and more hires were made this year.