Asset Managers: Compensation and Performance (Part I)

As recruiters we work both sides of the investment-management street: serving not-for-profits like foundations and endowments, and also fee-based (and mostly for-profit) money managers.

Those fee-based managers, especially the big ones, are newsworthy because they invest a lot of money for a lot of customers, including non-profits investors.  They’re closely watched by business reporters and financial analysts, who are always hunting for breaking news that might move the markets.

We have a different focus: we are more interested in the market for executive talent than in the markets for investable assets and we’ve been looking at the money-managers from that angle for quite a while.  Ultimately, we want to understand how the performance of their CEOs and senior managers is judged, how they are compensated, and why they are hired and fired.

We begin with a list of 36 publicly-traded, fee-based U.S. asset managers.  Most money managers are private and keep their compensation data away from prying eyes like ours.  Which means that our list includes a substantial sample of all publically listed asset management firms in the US, the only public and comprehensive source for the data we need.

However, we think the $16.5 trillion managed by our 36 SLAM firms is a useful proxy for judging executive performance.

From a headhunter’s point of view our 36-company SLAM list is intimate enough so we will be able to examine in detail (and almost real-time) the performance of individual CEOs as they try to turn AUM into revenues and earnings for their stockholders.

It’s also the starting point for an analysis of their asset flows, revenues, earnings, and management performance which we’ll roll out in subsequent letters.

Here’s our Skorina Listed Asset Manager List -the SLAM list.

SLAM Rank AUM	Towers Watson Rank	Asset Manager	Ticker	AUM 6/30/15 $ bns
1	1	BlackRock	BLK	$ 4,721.3
2	5	JP Morgan Chase AM	JPM	$ 1,780.0
3	6	BNY Mellon AM	BK	$ 1,724.0
4	12	Franklin Resources	BEN	$ 866.5
5	14	Invesco	IVZ	$ 803.6
6	16	T. Rowe Price	TROW	$ 773.0
7	17	Legg Mason	LM	$ 699.2
8	22	Affiliated Mgrs Grp	AMG	$ 642.7
9	23	Principal Fin Grp	PFG	$ 539.9
10	–	AllianceBernstein	AB	$ 485.1
11	18	Morgan Stanley IM	MS	$ 403.0
12	26	Federated Investors	FII	$ 349.7
13	27	Eaton Vance	EV	$ 312.6
14	28	Blackstone	BX	$ 332.7
15	–	OldMutual AM	OMAM	$ 226.6
16	35	Lazard AM	LAZ	$ 203.1
17	–	Carlyle Group	CG	$ 192.8
18	38	Janus Capital Grp	JNS	$ 189.5
19	–	Apollo Global Mgmt	APO	$ 162.5
20	47	Waddell & Reed	WDR	$ 120.7
21	–	Financial Engines	FNGN	$ 114.5
22	52	Artisan Partners AM	APAM	$ 109.2
23	–	Oaktree Capital	OAK	$ 103.1
24	54	KKR	KKR	$ 101.6
25	63	Ares Management	ARES	$ 87.5
26	65	Fortress Invest Grp	FIG	$ 72.0
27	–	WisdomTree	WETF	$ 61.5
28	77	Cohen & Steers	CNS	$ 50.1
29	–	Och-Ziff CM	OZM	$ 46.5
30	87	GAMCO Investors	GBL	$ 43.1
31	85	Manning & Napier	MN	$ 43.1
32	117	Pzena IM	PZN	$ 28.0
33	135	Calamos AM	CLMS	$ 24.4
34	–	Silvercrest AM	SAMG	$ 19.0
35	154	Diamond Hill IM	DHIL	$ 16.7
36	–	Hennessy Advisors	HNNA	$ 6.1
–	–	Total	–	$ 16,454.9

What’s an asset manager and who’s counting?

It’s not easy to accurately determine how many asset managers there are in the world and how much money they manage.

Central bankers and academics have been looking harder at these firms post-2008, worried about their role in global financial stability.

Andrew Haldane, chief economist for the Bank of England, noted in a speech in April, 2014 titled The Age of Asset Management that: “Academics, practitioners and regulators have been studying banks, their behavior and failure, for several centuries.  Analyzing and managing the behavior of asset managers is, by contrast, a greenfield site.”

Also, see Chapter 3 of the IMF’s Global Financial Stability Report, April 2015: Asset Management Industry and Global Stability which tackles the subject in greater depth:

https://www.imf.org/External/Pubs/FT/GFSR/2015/01/pdf/c3.pdf

In his speech Mr. Haldane cited the Towers Watson Top 500 List as a reliable source for global asset managers, and we concur.  We always pay attention when TW rolls out their annual list, which they just did.  And, since it’s directly pertinent to our own research, let’s take a quick look at the 2015 edition (using data for 2014 year-end).

Two important points:

01 TW’s 500 firms now manage a global total of $78.1 trillion.

02 The U.S. houses 139 of them and they manage $41 trillion, more than half the global total AUM.

The U.S. is more than holding its own in this global industry.  In just the eleven years 2004-2014 U.S. asset managers have increased their share of global AUM from 41 to almost 60 percent.  Some of that is organic growth in the U.S, but some of it has been subtracted from the Swiss, Japanese and UK managers.

The TW 500 is a well-respected list, but how complete is it?  If the top 500 managers have $76 trillion, then how much more would we find if we listed the next 100, or the next 500?

The short answer is: although there are a lot more than 500 asset-managers in the world, the TW list doesn’t miss very much AUM relative to that colossal total.

We note that some big firms like Man Group (a UK hedge-fund manager with about $42 billion AUM) and TPG (a major U.S. private-equity player with about $75 billion AUM) are omitted from the TW500 (along with quite a few other mid-sized HF and PE managers).  But other, similar, firms like KKR and Bridgewater are included in the TW list.  We’re not sure why.  But these inconsistencies probably don’t distort global AUM very much.

Various other sources and our own research suggest that there are thousands of significant fee-based asset managers in the world including those on the TW list with a current grand total AUM well over $80 trillion.

So, we think TW’s $78 trillion is a bit on the low side.  But the distribution of global AM firms is so long-tailed that the TW 500 still captures the lion’s share of AUM dollars.

PWC (PriceWaterhouseCooper), in a white paper published this spring, gives us a useful upper bound for these global AUM estimates. 

See: http://www.pwc.co.za/en/press-room/asset-manage.html

They predict that global managed AUM might be $100 trillion by the year 2020.  If we discount that number at 2 percent per year back to 2014, and add back a few trillion dollars out in the hard-to-count long tail of the distribution, we get a number that’s pretty close to TW’s.

What does that mean for our SLAM list?

We think TW’s $41 trillion AUM for 139 U.S. asset managers is a decent, conservative estimate for U.S. total AUM, and only a little on the low side.

That means that the $16.5 trillion AUM in our SLAM list captures about 40 percent of total managed assets for U.S.-domiciled firms.  That’s despite the fact that our 36 firms are only a fraction (probably less than 5 percent) of U.S firms managing over $3 billion AUM (when all the smaller hedge funds are counted).

As we mentioned above, our SLAM asset managers are important to us because they are exchange listed and subject to public reporting requirements.  So we can get our hands on enough data to do meaningful analysis on performance, compensation, and executive effectiveness.

On a global level, our 36 SLAM firms manage about 21 percent of the world’s total AUM.

Although we’ve chosen to include some relatively small firms, we also include some of the global giants.  This is deliberate.  In order to develop a framework for evaluating executive performance and pay, we wanted to have a representative group by both size and asset-type.  But in aggregate the SLAM list clearly punches far above its 36-company weight.

This also implies that the aggregate asset flows, revenues and profitability of the SLAM firms measured from period to period should be broadly representative of the global asset-management business.

Our own broad-minded position is: anybody who manages money on a full-discretion basis and charges a fee for that service, is an asset manager.  Regardless of what specific vehicle or strategy they employ — listed mutual funds/ETFs, separately-managed accounts, private equity, hedge funds, CTAs, or whatever — they are all “asset managers” in our book.

All-in CEO Earnings:

Let’s cut to the chase: who manages our SLAM firms and how much do they make?

CEOs and other “named executive officers” must reveal their annual compensation in a format prescribed by the SEC: the Summary Compensation Table, or SCT.  But it doesn’t always reveal everything about what a CEO actually takes to the bank.

Some listed asset managers, primarily the private-equity and hedge-fund firms, have complex structures which include partnerships nested inside or parallel to the SEC-registered entity.

If a CEO has partnership money in investment vehicles he may be receiving return on his capital which is not considered “compensation” by the SEC.  These earnings may be listed as an “other” item in the SCT, but not always.  Partnership profits or return of capital may also be disclosed in a footnote outside the SCT proper.

Also, some CEOs have very large holdings in their publicly-listed shares, which garner very large dividend payouts.

We’ve tracked down these items as best we can and include them in this table.  It sets out both official SCT comp and our “all-in” earnings totals.

(There are 38 lines in this table instead of 36, because two of our firms have a pair of co-CEOs):

CEO Compensation: Summary Compensation Table & Other Sources

CEO Name	FIRM	SCT Comp $000	Divids  $000	Invest Profit & Return Capital $000	FY14 Total SCT Comp & Other $000
Conway, William E., Jr.	Carlyle	282	95,100	247,700	$343,082
Black, Leon	Apollo	274	268,000	62,400	$330,674
Och, Daniel S.	Och-Ziff	1,142	270,249	–	$271,390
Rubenstein, David M.	Carlyle	282	98,200	132,300	$230,782
Ressler, Antony P.	Ares	4,304	–	113,291	$117,596
Gabelli, Mario J.	GAMCO	88,518	172	–	$88,690
Schwarzman, Stephen	Blackstone	85,889	–	–	$85,889
Kravis, Henry	KKR	64,451	–	–	$64,451
Roberts, George	KKR	64,375	–	–	$64,375
Fink, Laurence D.	Blackrock	23,862	9,626	–	$33,489
Bhutani, Ashish	Lazard AM	20,959	457	–	$21,415
Johnson, Gregory E.	Franklin Res	15,904	1,968	–	$17,872
Fleming, Gregory J.	Morgan Stanley	17,441	175	–	$17,615
Flanagan, Martin L.	Invesco	15,622	482	–	$16,104
Wintrob, Jay	Oaktree	15,711	–	–	$15,711
Steers, Robert H.	Cohen & Steers	3,124	12,478	–	$15,602
Erdoes, Mary Callahan	JP Morgan AM	15,600	–	–	$15,600
Faust, Thomas E., Jr.	Eaton Vance	11,247	2,329	–	$13,576
Arledge, Curtis Y.	BNY Mellon AM	11,937	425,315	–	$12,363
Sullivan, Joseph A.	Legg Mason	11,549	161,618	–	$11,710
Bain, Peter L.	OldMutual AM	11,427	–	–	$11,427
Kennedy, James A.S.	T. Rowe Price	8,902	2,492	–	$11,394
Zimpleman, Larry D.	Principal Fin Grp	9,370	361	–	$9,731
Weil, Richard M.	Janus	8,148	565	–	$8,713
Pzena, Richard S.	Pzena IM	2,372	6,310	–	$8,681
Herrmann, Henry J.	Waddell & Reed	7,687	–	–	$7,687
Kraus, Peter S.	Alliance Bernstein	6,786	–	–	$6,786
Colson, Eric R.	Artisan Partners	6,624	–	–	$6,624
Raffone, Lawrence M.	Financial Engines	5,507	–	–	$5,507
Healey, Sean M.	Affiliated Mgrs	5,370	–	–	$5,370
Calamos, John P., Sr.	Calamos AM	4,525	624	–	$5,150
Steinberg, Jonathan L.	Wisdom Tree	4,381	511	–	$4,891
Donahue, Christopher	Federated Inv	3,658	–	–	$3,658
Hennessy, Neil J.	Hennessy Advisor	2,438	279	–	$2,717
Nardone, Randall A.	Fortress	2,536	–	–	$2,536
Dillon, Roderick H., Jr.	Diamond Hill IM	1,035	1,038	–	$2,073
Hough, Richard R.	Silvercrest AM	1,375	–	–	$1,375
Cunningham, Patrick	Manning & Napier	1,012	156	–	$1,168

As this table suggests, there’s a big difference between a “hired hand” CEO on one hand; and a founder or partner who effectively owns a big chunk of the firm, but also functions as a CEO.

The two kinds of compensation are conceptually different even though accounting and regulatory conventions don’t always clearly set them apart.

There’s also the special case of an active founder/principal who is not officially an executive officer.

For example, Jay Wintrob was recently hired as CEO of Oaktree (which previously had no official CEO).  He has a very nice comp package, but he’s not making founder-type money.

Founder and co-chairman Howard Marks is the man most closely identified with the firm and undoubtedly banks a lot of money every year as return on his invested capital.  But he’s not an executive officer and his earnings are not disclosed in the firm’s proxy statements.

Founders and principals in these firms usually can’t be fired by an independent board like garden-variety CEOs in conventional public companies.  But that doesn’t mean that outside stockholders can’t indirectly reward or punish them.  They can walk away from an underperforming company and drive stock prices down to embarrassing levels. (Or, vice-versa in the case of a high-performer.)

We’ll consider all this in Part Two.  And, as promised, we’ll present our analytics and delve deeper into the asset flows, revenues and profits of these firms.

Watch your mailboxes for the next installment.