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Special report: The next generation

Active managers move closer to being endangered species

Debra J. Brown thinks the skill sets of most employees in active management just aren’t needed anymore.

The investment management industry has a history of sheltering endangered investment strategies past their prime, but time may be up for a swath of the global active management industry.

The combination of declining pools of defined benefit plan assets, the rapid rise of passively managed assets and commensurate fee pressure, higher operating costs and a forthcoming wave of money management successions is creating an environment that may prove dangerous for some traditional active managers, industry observers said.

Unless active managers can differentiate themselves and their investment strategies, "like any industry that sells a lot of generic products, the active side of the industry will inevitably be smaller," said Alan Johnson, managing director and president of compensation specialist Johnson Associates Inc., New York.

Recruiters agree, predicting that the biggest headcount cuts in the money management industry over the next few years will be from the active management sector, particularly among active equity managers.

"The biggest problem area in the industry is active management because there isn't much work there," said Debra J. Brown, managing director in the investment practice of executive recruiter Russell Reynolds Associates Inc., New York.

Those people who do lose their jobs may not have an easy time finding another, observers said.

"There are a lot of people who won't find a home if they lose their jobs because their skill set isn't needed," Ms. Brown stressed.

Consultants, who pay close attention to staffing levels at money managers as part of due diligence on behalf of their investment clients, said some firms managing public market assets, especially equities, are shrinking in size.

The result is a large candidate pool for companies that are seeking active management portfolio managers, analysts and researchers.

"It's really a buyer's market with a shrinking number of positions and a growing pool of applicants" said Mitch D. Dynan, managing principal and head of public markets at investment consultant Meketa Investment Group Inc., Westwood, Mass.

If a manager runs an advertisement for a position in active management, it often attracts 500 resumes, even in tertiary markets, Mr. Dynan said.

"As assets are declining at these firms, it's not a question of staffing up, but rather of staffing down," he said.

For many active money managers, "the situation is tough to the point of existential survival. For CEOs, it's a rougher gig than has ever come before. The industry will look much different over the next five to 10 years," said Roger Urwin, global head of investment content, Willis Towers Watson PLC, London.

Another complication for money managers is "looming succession, given that it's been 30 and 40 years since many money management boutiques were founded. Their founders are all over 70 now," said Michael Falk, partner at Focus Consulting Group Inc., Long Grove, Ill.

Mr. Falk stressed that "the people who are inheriting these companies will have to make very different business decisions than their predecessors," possibly including sale, acquisition, partnership, a new company model and closure.

Succession planning is "very tricky," said Meketa's Mr. Dynan, noting that "only a minority of firms are successful in handling the transition. Very few firms get it right."

The reduction of the headcount among active money managers may, however, be a boon for asset owners, which can find it difficult to lure talented portfolio managers away from the higher compensation of the investment industry, recruiters said.

The State of Wisconsin Investment Board, Madison, for example, "remains committed to active management and is looking to be opportunistic in hiring people from active management companies," said Brian Hellmer, managing director of public equities.

SWIB, with a headcount of 203, managed 58.8% of its assets internally. There are 23 managers of active equity on the team and one position currently is vacant.

SWIB manages a total of $110.4 billion in Wisconsin state funds, including $100.7 billion for the Wisconsin Retirement System.