‘Winner of hearts and minds’: Choosing the right fund manager successor

succession plans fund management Hamish Douglass Perpetual JOHCM recruitment sqm

28 October 2024
| By Laura Dew |
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The necessity of a succession plan for fund managers is becoming more important than ever as departures from two firms cause upheaval with mandates. 

Earlier this year, Peter Rutter announced he would be leaving the global equities division at Royal London Asset Management (RLAM) to set up his own firm Life Cycle Investment Partners which would be an affiliate of Pinnacle Investment Management. 

As well as the exit of “star manager” Rutter, portfolio managers Chris Parr, Will Kenney, James Clarke and Niko de Walden also left with him. 

In response, RLAM said it retains significant resourcing and had made several senior appointments to replace the departing managers, as well as retained the same investment philosophy on the funds. 

While Life Cycle initially expected to be able to take clients over the new business, delays regarding the firm’s employment constraints with RLAM led institutional mandates such as Ironbark to hold off and retain their exposure with RLAM instead.

Pinnacle said the firm is now formally managing money with two funds having launched on 30 September. 

Meanwhile, over at J O Hambro Capital Management (JOHCM), part of Perpetual, the firm witnessed the departure of UK equities manager Alex Savvides to join UK-based asset manager Jupiter. 

In the FY24 results, Perpetual said outflows were “higher than expected” and had been exacerbated by the departure of Savvides with the firm losing $18.4 billion in the full year. In the first quarter of FY25, Perpetual reported overall inflows but JOHCM’s assets under management still decreased by 1.9 per cent to $37.5 billion thanks to outflows of $1.6 billion during the quarter. 

New chief executive, Bernard Reilly, announced the turnaround of JOHCM was a strategic priority for the asset management division as he sought to stem the outflows.

As part of its succession, JOHCM retained the analyst team and appointed members of the firm’s UK growth equities team Vishal Bhatia and Mark Costar to run the UK Dynamic strategy. 

Fund manager succession 

Rutter and Savvides were both mid-way through their careers and moving onto new firms but a second issue is coming to the fore regarding the departure of founders or senior talent as a generation of Boomers come up to retirement. 

A report by KPMG said talent retention to replace departing managers is a key concern for asset management chief executives as well as loss of knowledge. The survey found 89 per cent plan to expand their workforce over the next three years but are fearful of a talent shortage occurring simultaneously with the retirement of older Boomer employees. 

Mischa Bennett, managing director at Capital Executive Search, said: “20 years ago, fund management was a great industry to join but now we are seeing far fewer new people come through as a lot of firms can’t justify the cost of hiring.

“The asset consultants are starting to bring it up as well. They are concerned about key person risk which is huge. If no one is coming through to replace a senior person, then the fund could be downgraded.”

In a high-profile example of succession gone wrong, the sudden departure of Hamish Douglass from Magellan in February 2022 caused upheaval for the manager and billions of outflows from its funds that took multiple years to rectify. 

As well as his skill as a portfolio manager, Douglass was a co-founder of the company back in 2006 with Chris Mackay, as well as being appointed as its chief investment officer in 2014 and chairman in 2018 and was seen as the company’s figurehead in the media.

Since the shock departure, investors and shareholders were left struggling to understand who was running the show. 

Mackay initially stepped up to take an expanded role as chairman before David George was appointed CEO in May 2022. However, his tenure was brief as the appointment of Andrew Formica as a non-executive director in June 2023 led to his departure in October 2023.  

Formica then moved into an executive chair and appointed former Maple-Brown Abbott chief executive Sophia Rahmani as managing director.

Enacting a successful succession

When it comes to ensuring a successful succession, Matt McGilton, managing director at Kaizen Recruitment, said the best firms will plan a succession as many as 10 years in advance. 

“The best leaders plan for a succession well in advance and find one or two people who they can lock in with equity stake to take over the business. It’s not always executed perfectly but at least a structure is in place.”

As for whether fund managers look to specifically hire for a successor or whether that becomes more evident once the person is in place, he said it is important to be mindful of an existing team.

“I’ve sat on a panel where they wanted to hire a successor because they knew it was a business risk but you have to be very careful with the optics and how it will look to the existing team. The intention may be for the person to be a successor but you have to be careful what you say, it may not come up until later on in the process,” he said.

Bennett said the problem with choosing a successor is that the individual needs to be so much more than a good investor. The departing manager is also likely to have held multiple roles; they may have been a CIO, CEO, chairman or managing director as well as portfolio manager.

He explained: “They need to be a winner of hearts and minds, they need to be an amazing investor, they need to be able to talk to the media and they need to be able to sell the fund to clients.

“I would recommend succession is taken very slowly, it will be a multi-year handover with five years minimum.”

From a research house perspective, Louis Christopher, managing director at SQM Research, said he would want to see at least three years of handover between managers.

“The risk of a knowledge gap is definitely an issue, most managers will try to mitigate the risk by having senior people in place so the business can still be run well after a departure.

“Where it is becoming more of a risk is with the growth of alternatives where a lot of firms are still small and the knowledge of a niche asset class would be hard to pass on.”
 

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