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When a star manager departs, the headaches begin for asset management firms

Companies can do little to prevent resignations — which often mean large outflows — other than offer a very competitive retention package

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It’s an issue that bedevils any asset management firm, particularly a mutual fund manager: The extent to which part of the firm’s success in gathering assets and clients is related to the prowess of one star portfolio manager. The real problem, of course, is the converse: The extent to which assets leave should that star manager depart.

That potential bind is why some firms do not promote the concept of a star manager but rather the idea that they have many good capable managers, all of whom could step in in the event a portfolio manager leaves.

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Three-plus years back, the world watched as Bill Gross, the so-called king of bonds, left Pacific Investment Management Co., in part because senior executives had reportedly grown impatient with his leadership. Gross, who had spent more than 40 years at PIMCO and had helped turn it into a US$2 trillion giant, was the star — the face of the company.

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Gross, then 70, promptly decamped to Janus Capital, a much smaller firm, a move that led to some clients following the star manager. He also filed a US$200 lawsuit against his former employer. Last March he reached a settlement that will see him receive US$81 million.

In the spring of 2012, AGF was stung when Patricia Perez-Coutts, a senior vice-president and portfolio manager, left the firm along with four of her associates. Perez-Coutts managed AGF’s $2 billion emerging markets fund, which accounted for nine per cent of retail assets under management.

The departures — all moved to Westwood Holdings — raised the risk of significant outflows. At the end of 2017, according to AGF’s website, there were $714 million of assets under management in the emerging markets fund. Last October, AGF received $10 million as a result of a lawsuit it filed over the departure.

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The matter of manager departures and potential outflows is now engulfing Gluskin Sheff & Associates, following the October 2017 departure of Jeannine LiChong. She was the manager of the firm’s GS + A Premium Income Portfolio, which accounted for 22 per cent of the firm’s assets.

This week, the firm reported some preliminary estimates that showed it had a record $9 billion under management, of which 87 per cent are accounted for by high net worth individuals, but that it had sustained outflows of $166 million, almost two per cent of beginning AUM in the quarter ended Dec. 31. That marked the largest quarterly net withdrawal since 2011. (One client accounted for half of the withdrawals.)

Last month it added two replacement managers.

When reached Friday, Gluskin Sheff said it had no further comment.

In a report, Nik Priebe, an analyst at BMO Capital Markets said “we continue to await a sustained recovery in net sales before forming a more constructive view on the stock.” Priebe, who rates the stock as a market perform, added he remains “cautious on the persistence of redemption activity,” noting the company has reported net outflows in 11 of the prior 12 quarters.

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Geoffrey Kwan, an analyst with RBC Capital Markets expressed similar thoughts, noting the “significant” net redemptions are likely due to three factors: the recent departure of a key portfolio manager, significant senior management turnover in the past couple of years and/or arbitration between the company and its two co-founders, which was resolved last year.

While overall investment performance “remains positive,” Kwan added, “we think there is lower visibility regarding the timing of returning to positive net sales.”

As for a solution, apart from barring managers from leaving, there’s little an employer can do, other than create the right ownership, incentive and compensation structure — and hope the star manager doesn’t get a phone call promising something more attractive.

bcritchley@postmedia.com

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