Why do fund managers get paid so much? How should we invest in a crisis? Do we face inflation or deflation? Merryn Somerset Webb talks to Edward Bonham Carter, the chief executive of Jupiter Fund Management.
I’m sorry to have to tell you that the most interesting bits of my conversation with Jupiter’s CEO Edward Bonham Carter took place both before and after the official interview.
Before we all turned our tape recorders on (that’s how it works these days), we talked about the progress of feminism. A few weeks ago, Dr Catherine Hakim of the LSE published a paper suggesting that women today “marry up” more often than women in the 1940s. This was seen by most of the press as deeply disappointing. I’m not sure. A happy life has options. If you marry someone who can support you and your children should you wish them to, you certainly give yourself more options than if you don’t. It doesn’t mean women can’t finance a household. And it doesn’t mean they want to chuck in their jobs on the post-honeymoon trip back from Mauritius.
Instead, for most women, marrying someone who is more than just loveable is an insurance policy – just like holding gold is for investors. Most women don’t want to give up work. And most investors don’t actually want the global fiat money system to collapse. But it’s as well to be prepared. Bonham Carter didn’t seem to like this idea much. I’m guessing that’s because fund managers tend to end up as the insurance, rather than the insured, when it comes to this kind of thing.
We only had an hour scheduled for our chat so rather than dwell on all this for too long we moved on to the interview proper, starting with one of my long-term obsessions – fund manager responsibility. It seems to me that as the UK’s fund managers are also the largest shareholders in most of our big listed companies, they should be held responsible for much of what goes wrong at those firms. They should be doing something about the fact that CEO pay has leapt from an average of 47 times worker salaries to 88 times in a decade, for example. I say to Bonham Carter, isn’t it the likes of you, as shareholders, who should be demanding that pay is lower and dividends higher? Perhaps if fund managers had done this, they may have had a chance of holding back the skewed incentive structures that in part fuelled the credit bubble?
Bonham Carter spends some time skirting around this issue. He is good at this – trying to figure out what he really thinks on it takes up the first eight pages of my interview transcript. The “key thing” Jupiter wants to know as a shareholder, he says, is whether the “top management is on our side”. Are they “empire building” or “actually taking the pound invested and… adding value to it”. To make sure it is the latter, compensation needs to align the incentives of shareholders and managers. That means bonus structures and so on. When we move on to talking about fund management he makes the same point. Smaller firms should make everyone an “owner” of some kind so that they too have an incentive: this is the way things work at Jupiter, where “most of the rewards that we make… are through ownership”.
I’m not convinced (as ever). Most people have contracts that oblige them to do their best in their jobs. If they do, they get to keep their jobs. Assuming they get paid the right wage for what they do and their working environment is pleasant, that is all the incentive required. I can’t see why that doesn’t work for CEOs – after all, in the main they didn’t take on the risk of setting up the super-tanker firms they preside over – and I can’t see why it doesn’t work for fund managers. We pay them their 1% or 1.5% a year to manage our money to the best of their ability. If they manage to do so, why should we pay them more? They aren’t taking any risk, just doing a job they are paid to do. No one has yet come up with a good reason for it. Bonham Carter doesn’t either.
At least, he offers, his managers are all invested in their own funds so they are “eating their own cooking”. That seems to reinforce the wrong point to me: if their interests are aligned via being invested in the funds, then what do they need performance bonuses for in the first place? Surely the job’s already done. Still, overall Bonham Carter does concede that there is a problem – outside his industry at least. But he also thinks that big shareholders are getting to grips with it. They have begun to “express their dislike, disappointment, whatever you want to call it… remuneration committees are being voted against”.
Hmmm. Pretty rarely, I say. He mentions an incident at Shell. And there have been a few protest votes this year at the likes of Reckitt Benckiser, Xtrata and Lloyds. However, not only is that a pretty small number, but the protest votes haven’t been big enough to actually change anything. Seems to me the fund management community has a way to go in the responsibility stakes.
Still I can’t go on about all this for more than eight pages. I’m interested, but not obsessed. So I widen things out a tad and ask him how he feels about the medium-term future of capitalism. He sees risks – mainly that as the gap between rich and poor rises we will see “increased disaffection” from those who no longer believe in the “capitalist promise” (work hard and you’ll do well). He’s worried this might lead us towards a “serious protectionist move”. If 40 million Americans are on food stamps and they know that’s because their jobs have migrated to the Far East, then protests followed by “a breakdown in world trade” have to be a risk.
However these concerns are tempered with optimism. Politics is all about two things, “how you create the cake and how you divide the cake up”. It is tricky stuff, but in the end the bigger the cake the better, and so far capitalism is the “better system for increasing the size of the cake”. Anyway, a shift to protectionism, while nasty, is hardly going to mean “we immediately go to socialism”.
Back to the East-West thing. I ask if he thinks that breakneck Chinese growth – the export machine stealing American jobs – is sustainable? Here we agree. He expects a crisis. The Chinese are trying to pull off “one hell of a trick”. Marxist theory makes it clear that changes in the economic base have “inevitable consequences” for the superstructure – ie, for politics and so on. The ruling party knows the theory, but it is taking the risk anyway. “So they are going to hit some roadblocks.” Timing “is uncertain”, but there will be boom and bust, just as there has been in every other fast-developing country.
What about the ‘flations? At MoneyWeek we are leaning towards the problem being inflation. Bonham Carter is sort of with us. He is worried about stagflation, thanks to the fact that in Britain we are “below our operating capacity” even at a time when prices are rising. He worries that, as people “realise they are getting real income cuts”, they will demand rising wages. So does he worry that will turn into hyperinflation? “Not yet, not yet.” But longer term, “how do you deal with big debts in the Western world? “Some form of default” and inflation would seem to be the easiest answer.
Does that make UK property a buy? Not really. For all the same reasons we think prices should fall, he thinks property as an investment won’t be “that interesting”. So what does the worried punter buy today to preserve his living standards? Bonham Carter says equities (he would say this, of course, but I think he does believe it too). He doesn’t think gold is overvalued and likes gold miners. He also sees a lot of large-caps valued on p/es of ten to 12, which he perceives as “not a bad place to be”. Two favourites are Unilever and, for its 48-year record of unbroken dividend rises, Johnson & Johnson. If earnings have a reasonable prospect of growing, “you are going to get dividend growth, which gives you some – not all, but some – inflation protection, which you don’t get with bonds”. That generalisation changes when inflation moves much beyond the 5%-6% (the level that spooks investors).
I wonder what else he might worry about. Population explosion, as it turns out. I’m not so bothered on the basis that once a nation gets relatively rich, the birth rate falls incredibly fast. It takes one generation for people to move from having five kids to having two, if they have any at all. In most Western societies, having lots of children has become a privilege of the very rich – the rest of us can’t take the financial risk. It used to be that the risk was in not having children (they paid for you later). Today, the risk is in having them (you pay for them now). I think the turn will come sooner than anyone imagines in emerging markets. Bonham Carter sort of agrees, but still thinks we will hit eight billion people. That means stress on food and on water – think more stagflation and more geopolitical worries.
We leave it there – our hour is up and we all turn our recorders off. I haven’t got to the bottom of why fund managers get away with being paid so much, but taking so little responsibility. And I haven’t learnt any new magic money-making tips. But I’ve enjoyed myself and I get a bonus from walking across the park with my interviewee to our respective lunch dates. On the way we skip feminism to talk about the really interesting thing in both our lives – our children. And I learn one final thing about Edward Bonham Carter: he walks much, much faster than I do.
Who is Bonham Carter?
Edward Bonham Carter was appointed chief investment officer of Jupiter Fund Management in July 1999. He took over as joint chief executive in 2000 when John Duffield (who later started New Star, now part of Henderson) left. In 2007 he led a £750m management buy-out of the firm, supported by a US private-equity firm. The majority of Jupiter staff became shareholders in the wake of the buyout.
The firm, now one of Britain’s better-known fund management names, has around £20bn in assets under management. It listed last year – at which point Bonham Carter sold £6m worth of shares. His remaining stake is worth many times that. The successful float won him the Chief Executive Of The Year award at the FN Asset Management Awards. He is married with three children.