After having previously centered on autonomous “star managers,” money management firms are now placing more emphasis on succession planning and compensation as they seek to create deep team cultures, said a new report from Moody’s Investors Service.
The ratings agency’s report, “Asset Managers Aim to Lock Out Key Person Risk,” said these improvements in the management of “key person risk” are credit positive.
Following prominent exits of high-level executives at managers such as Pacific Investment Management Co. and Waddell & Reed Financial, many money managers have improved governance and established succession plans to reduce the downside risk of key-person departures.
While active managers will never be fully immune from this type of risk, many have started to make advances in mitigating it, the report said. Corporate governance and risk management are key qualitative factors within Moody’s asset management ratings, and improvements in the management of key-person risks are credit positive for asset managers.
The report asserts that firms have realized that having any one star manager or group be too central to the franchise can be a major detriment to the long-term future of a company. As a result, money managers have begun to focus on building infrastructure, policies and procedures that focus on repeatable, proven investment processes that are transparent to investors.
TCW Group, for example, has shifted away from its former “star manager culture” — where almost three-fourths of its assets under management were managed by one person, Jeffrey Gundlach — toward a culture focusing on teams.
Asset managers are placing greater emphasis on contingent compensation and equity incentive plans. Companies are focusing on creating well-structured contingent compensation plans that provide incentives for employees to stay with the firm and maximize their value creation, according to the report.
Moody’s cites Legg Mason as one company that is using management equity plans to give its affiliate managers a stake in the long-term growth of their businesses. These policies help retain key individuals and create a culture that is more holistic than individual.
In addition to compensation, firms are also emphasizing succession planning, knowledge sharing and cultural identity as means of mitigating key-person risk. The report argues these initiatives will help firms develop deeper benches of investment talent.
Invesco and Neuberger Berman Group are identified as examples of firms that are putting strong emphasis on developing clear succession plans within investment teams and communicating these plans to investors.
Franklin Resources recently created a global macro team to leverage the macroeconomic expertise of its global bond team across its entire investment platform. Similarly, BlackRock continues to make significant investments in BlackRock Investment Institute, a unit established to facilitate the exchange of ideas between investment professionals across the firm.
By adding transparency, collaboration and knowledge flow, these firms build a strong team of successors, Moody’s said.
The full report is on Moody's website and is available only to online subscribers.