The questions pitched by Money Magazine
columnist Jason Zweig to panelists at the second day of the ICI meeting last week seemed downright hard-hitting, compared to the softballs lobbed during Tyler Mathisen's interview with outgoing ICI President Matthew Fink earlier that day.
Among the questions that John Brennan
, chairman and chief executive officer of Vanguard, Robert Dow
, managing partner of Lord, Abbett & Co., and Dawn-Marie Driscoll
, independent director of Scudder Funds fielded was the much- debated issue of portfolio manager compensation.
Zweig first tackled the subject by asking if compensation should be directly tied to performance.
Dow and Driscoll opposed performance-based compensation on multiple grounds, including potential unintended investment consequences and proper incentives already in place.
"We do not have performance based fees…that can lead to increased risks [in the short term]" said Driscoll.
"What appears to be good performance…isn't" said Dow, implying that managers, in their pursuit for performance, may invest out of their stated sector or strategy. He added that Lord Abbett conducts constant reviews of manager's performance, style and investing framework.
Dow added that the biggest disincentive for managers is losing their most sophisticated clients -- institutional accounts, which are tied to performance. Thus, managers' compensation is indirectly tied to performance, the "one thing" managers can focus and control on, said Dow.
Brennan quietly rebutted his panel colleagues and stood his -- and Vanguard's ground: Brennan said there are better incentives when manager pay is tied to compensation: "We like managers to say 'yes, I'll take that bet.'" Brennan continued, "I think it should be more prevalent," adding that Fidelity bases some manager compensation on performance.
Zweig revisited the topic towards the end of the panel, asking the panelists about their thoughts on required disclosure of manager compensation.
On this issue, Dow and Brennan found themselves on the same side of the table.
Dow elicited laughs from the audience and Zweig by remarking that if disclosure was required, Money Magazine
would probably be one of the first to publish an article featuring a table of manager compensation. The hypothetical article, however, would not convey the subtleties, such as historical performance and tenure of the manager, added Dow.
Dow called the disclosure an "invasion of privacy," responding to Zweig's persistent questioning by saying "why should my neighbor know [how much I'm making as a manager]."
Dow continued his opposition, saying that disclosure is "not relevant" to an investor's decision-making process, but that the information is fair game for boards -- indeed, they "should know."
When asked by Zweig what would happen if disclosure for other public companies was no longer required, Dow admitted that he is the "first one to look" at salary information, but reiterated that the information isn't highly relevant to investment decisions.
Zweig posed the question a little differently to Brennan, asking what is different about public fund firms versus other publicly held companies. To that, Brennan replied that he did not think there are comparable positions to portfolio managers at public companies.
Brennan also made the point that the structure of compensation is what is important and should be disclosed, not the quantity.
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