Jonathan Davis column

`It is too easy for "star" managers to start believing their own publicity and forget they are in a service business where the client should come first'
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The Independent Online
The lady herself may have quietened down, but the ripples from the Nicola Horlick affair are clearly still spreading. Ten days after the fund manager's melodramatic walk-out from Morgan Grenfell Asset Management, the issues raised by her going are a long way from being resolved. It has been a riveting spectacle for those outside the City, but it is not the kind of thing that does the reputation of the investment management industry any good at all.

In a business where discretion is unsurprisingly held at a big premium, her extravagant behaviour, galumphing off to Germany to confront her bosses with the world's media in tow, seems to represent a quite remarkable lapse in judgement for someone with so successful a career behind her.

So bizarre, in fact, do her antics seem that some of her counterparts at other companies were even questioning this week whether she can still be in her right mind. Of course, in a way that is a convenient response. Many of the questions her departure raises are ones that affect the whole industry, not just a single besieged firm. It suits the rest of the industry to cast her, if they can, as a loose cannon.

The key questions for investors are: where does her departure leave Morgan Grenfell in the investment management business? Is any fund manager, however good, worth the kind of money she was said to be earning? And is the emergence of a "star" system in fund management really an appropriate development, given the nature of the business?

As far as Morgan Grenfell is concerned, the jury is still out. Coming so soon after the Peter Young disaster, Deutsche Bank faces an uphill struggle to hold its business together. Although the rest of Mrs Horlick's team are said to be loyal to the firm, and its recent performance record remains good, it will require a large marketing effort to convince pension fund trustees and potential clients that the business has not been terminally damaged.

Morgan Grenfell has done exceptionally well in pension fund management and its unit trust performance was improving until the wheels came off its European fund last summer. The strength and weakness of its asset management business is that it has grown so rapidly. It only moved into fund management in the l980s. Rather than grow its own fund managers, it has built a strong market position by buying in established names. In that sense, it is the Newcastle United, not the Liverpool, of the modern money management game.

Unlike, say, Schroders or Mercury Asset Management, which have mostly grown their own stars and tried to bind them in for the long term, Morgan Grenfell has much shallower roots than its competitors. After its succession of recent mishaps, there have to be big question marks over its management competence and its operational culture. It will be some time before it wins any more new clients.

The question of an individual fund manager's worth is rather easier to answer. As my chart shows, institutional fund management has grown so fast in the past 15 years that it has become a very lucrative business indeed (and one, incidentally, where Britain has happily established a genuinely strong competitive advantage). Helped by the rampant bull market, assets under management have grown six-fold in real terms since 1980, according to an official report this month. Fund managers' earnings now contribute roughly 0.4 per cent to the country's GDP.

It is a fiercely competitive business where performance counts for nearly everything. Any firm that has a good track record over three years or more can expect to win a big chunk of any new business that comes along. Fund management firms are paid on a percentage of the assets they manage, so any genuinely outstanding individual can - just as now happens in football - command a very high personal income and still be worth employing.

So if Mrs Horlick was as good a fund manager as she has been made out to be, then it is quite easy, in strictly economic terms, to justify the pounds 1m or so a year she is reported to have been paid. Was she that good? By all accounts, quite probably. But the vast majority of fund managers do not outperform the market as a whole over more than a three to five- year period, and a large number quite sensibly do not even try very hard to do so.

As long as the demand for outperformance is there, then the "star" system in fund management is bound to persist. It is the marketplace at work. Nobody can quibble with that. But it is all too easy for "star" managers to start believing their own publicity and forget that they are in a service business where the client should always come first. As Barings discovered, strong brand names in this field are hard won, but easily lost.

The other point is that the line between relative success and relative failure in this business, perhaps more than any other, is gossamer thin. Luck, as well as skill, has a big part to play in it. Warren Buffett, the great US investor, says that fund management is 75 per cent marketing and only 25 per cent genuine performance. In their different ways, Mrs Horlick and Morgan Grenfell may have rediscovered, to their cost, how very true that is.

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