The asset management industry in Scotland – and the rest of the UK, for that matter – is grappling with a problem that cuts to the very heart of its existence. No, it’s not the pressure on fees. Nor is it investors growing love affair with passively-managed funds. 

Fund managers are suffering from a dearth of fund managers. If not tackled robustly, the problem may persist for many years to come.

Why are fund managers in such short supply?

Being a fund manager is viewed as a glamorous and lucrative career – certainly within the context of the financial services industry. Historically, firms have never had a problem attracting the biggest and brightest minds.

But it is not the supply of talented individuals which has caused the current drought. It has been a hiatus in demand following the global financial crisis.

The global financial crisis

In step with the near collapse of the markets in 2008, most UK asset managers stopped or at least significantly reduced their graduate programmes. Many schemes didn’t return to normal levels until 2012 or later.

These short-term decisions have had a significant long-term impact on the industry, as the career path of a fund manager is a particularly specialist one these days.

Gone are the days when a music or physics graduate would transition seamlessly into the world of money management; and rarer still that a chartered surveyor would step up to manage a UK smaller companies fund.

For the purposes of illustration, we will assume a fund manager’s career now typically follow this trajectory:

• Graduate trainee 
• Junior investment/financial analyst 
• Senior investment/financial analyst 
• Portfolio manager 
• Named fund manager 

The right combination of talent and opportunity could see a graduate become a fund manager in, say, eight or nine years. Or it could take much longer.

Given that graduate intake stalled in 2008 and didn’t resume properly until at least 2012, we are entering a period where the candidate pool for these roles is extremely restricted. It follows the same simple logic of a society that experienced no child birth in 2008. It will have no nine-year olds in 2017.

If we look at the chart below, we can see the potential long-term effects of the decision to cut back on graduate programmes and the reverberations further up the talent pipeline.

How to plug the fund manager ‘gap’

1. Put in place a long-term succession plan for fund managers

There is little point in closing the stable door after the horse has bolted, but it is somewhat ironic that an industry which prides itself on both investing at the bottom and investing over the longer term is now suffering from short-sightedness.

This, of course, is not to underplay the huge commercial pressures which were present during 2008 and beyond.

But unless the global financial crisis was viewed as the end of capitalism, it has been a self-defeating move to cut off so definitively the flow of future talent. This is especially true if we consider the relatively modest costs that graduate programmes incur.

If we experience similarly serious market dislocations in the future, we would all hope the lessons of the past will have been learned.

But we cannot turn back the clock. So what can be done now to solve this problem?

2. Recruiting fund managers externally

One solution for any employer suffering from a talent gap is, of course, to go out to the market in search of suitable candidates. This would be a normal response.

Advantages

• Access to a much wider pool of talent than available internally 
• Opportunity to add skills missing or underrepresented in current team, e.g. geographic (emerging markets) or sector (technology) expertise, foreign languages, etc. 
• May increase diversity of workforce, e.g. gender, ethnicity, cultural, etc. 
• Injects new blood into the workplace, and, with it, innovation and fresh thinking 

Disadvantages

• 2008 was a global financial crisis. As such, the gap in fund management expertise is an international one 
• Looking externally may create internal unrest and instability. It may demotivate existing employees who feel they are being overlooked. Flight risk may be increased 
• External recruitment can be expensive 

To be successful in this approach, you may need to look beyond UK shores. You would also do well to partner with a recruiter experienced in attracting international candidates to the Scottish market. 

And you would do well to appreciate the challenges of recruiting internationally and how best to manage these.

3. Promoting would-be fund managers early

One person’s problem is another person’s opportunity. An option you may have is to accelerate the development of talent individuals that already exist within the organisation, whether it’s a junior analyst moving to senior analyst, or a portfolio manager being promoted to a named fund manager.

Advantages

• They already know the business, its systems, operational processes and culture 
• Their promotion, in turn, frees up the levels below them, which are easier (bigger talent pool) and cheaper (lower salaries) to fill 
• Sends a strong signal to the rest of the business – talent and hard work will be rewarded 
• Logistically easier. They already work within the company 
• Cheaper than recruiting a more experienced professional from elsewhere 

Disadvantages

• They may not be ready yet. You risk creating a high-profile failure 
• If people are pushed beyond their current capabilities, it can cause enormous pressure, a build-up of stress and burnout 
• May be viewed negatively by clients. A 30-year-old running a 1bn plus pension mandate, might be viewed negatively by a trustee twice their age. After all, they are paying for knowledge and experience 
• If unsuccessful, it can damage your service, reputation and brand 

4. Identifying potential fund managers from other parts of your business

There may be potential in considering high calibre individuals from other departments within your business. Applicants from areas such as finance, risk, compliance, audit and corporate governance could be suitable.

A demonstrable enthusiasm for and a commitment to investment analysis/portfolio management would have to be a prerequisite.

Advantages

Many of those outlined within ‘Promoting would-be fund managers early’, including:

• They already know the business, its systems, operational processes and culture 
• Sends a strong signal to the rest of the business – opportunities are open to ALL within the business 
• Logistically easier. They already work within the company 
• Cheaper than recruiting a ‘like-for-like’ replacement from another company 

Disadvantages

• Leaves another gap within the business, which may prove difficult to fill 
• Likely to be a steep learning curve for anyone making this switch, regardless how talented and capable they are 
• A medium-term rather than an immediate solution, i.e. quicker than a graduate but probably slower than an investment analyst 
• Again, may be negatively viewed by clients 

5. Retaining experienced fund managers

In the absence of suitable internal or external candidates, the only immediate option you may have is to retain on a longer-term basis your experienced fund managers. Traditionally many fund managers, when in their 50s and having made their money, choose to step away from the pressures of managing money on a day-to-day basis.

Advantages

• Promotes consistency, continuity and stability in the eyes of clients and investors 
• Retains knowledge and expertise within the business for longer 
• Is consistent with the longer-term trend of people living – and therefore working – longer 

Disadvantages

• Could encourage complacency, demotivation and falling engagement – impacting ultimately on fund performance 
• Stifles innovation and fresh thinking 
• Creates a general atmosphere of stagnation 
• Demotivates those below them – ‘dead man’s shoes’ 

6. Blending experience with talent

A more balanced and progressive solution is possible. Combining the best parts of 3 and 5 (and even 4), it would involve a multi-year handover process, where the underexperienced investment analyst or portfolio manager works alongside the experienced fund manager.

It would be highly structured, with a clear timeframe of when the junior partner would take full and sole responsibility and when the senior fund manager would step down.

Investing in the future

With this problem set to persist over several years, it is unlikely that only one of the solutions outlined above will be enough.

Successful asset managers will be the ones that embrace multiple strategies and approaches. We do not need to preach to fund managers about the benefits of diversification.

Such an approach will ensure you have the very best talent, safeguard your business against future talent shortages and ensure you gain and maintain an advantage over your competitors.