Fund fat cats get rich as investors suffer
Customers of Gabelli mutual funds lost an average of 44% of their portfolios last year, but Mario Gabelli made $47 million. He and many other big-name fund executives have yet to scale back their pay despite their dismal performances.
By Timothy Middleton
Whatever happened to pay for performance?
As mutual funds have lost billions of dollars in shareholder value, fund executives have continued to reap generous rewards as if the bull market never died.New features
and free stuff.
Money 2003 is here.
Federal regulatory documents show that annual compensation for Mario Gabelli, an executive with a family of funds that bear his name, rose last year to more than $47 million -- even though his equity funds’ shareholders have lost an average of nearly 44% of their money since the bear market began. The details of Gabelli's pay package emerged in a comprehensive examination of public records by MSN Money, revealing the compensation practices of the country's leading mutual fund companies.
Few peers have matched Gabelli’s excesses, but many have done royally well at the helms of foundering ships:
Bruce Calvert, chief of Alliance Capital Management (AC, news, msgs), took home $12.1 million last year, even though his funds have lost a cumulative 45.6% in the bear market.
Thomas Bailey got paid $8.9 million last year at Janus Funds as the sole beneficiary of the company’s financial incentive plan, even though his equity portfolios have tumbled 62.7% -- the most in the industry.
Raymond “Chip” Mason of Legg Mason (LM, news, msgs) pulled in $7.7 million as his funds have sunk 38.8%. Part of that compensation involved the company’s help in paying off a loan it extended to Mason four years ago.
Manager pay comes directly out of the pockets of fund shareholders, in the form of expenses. If the bright light of publicity were focused on the awesome amount of investor capital gobbled up by executive pay and perks, those expenses just might go down.
Alarming disconnect
This disconnect between the industry’s leaders and their customers alarms many fund advisers, and particularly those who have paid scant attention to the fund-chief data provided in every fund complex’s filings with the Securities & Exchange Commission.
“Investors don’t know about this -- if they did, they’d be outraged,” says Ric Edelman, an investment adviser in Fairfax, Va.
At companies similar to Gabelli’s, compensation on this level is hardly the norm. At its peak, the firm managed assets of $9.1 billion. By contrast, W.P. Stewart (WPL, news, msgs), a Bermuda-based company with assets under management of $9.2 billion at the end of last year, paid total compensation to all of its directors and executive officers of $7.6 million.
Gabelli’s pay “has been an issue with the investor community,” says Michael Kim, an analyst with Putnam Lovell, investment bankers that specialize in financial services. “They don’t want to put money in Mario’s pockets, so to speak.”
Gabelli’s shareholders’ pockets are half full of lint. Between the market’s peak and its bottom on July 23, the asset-weighted return to investors in Gabelli equity mutual funds was a negative 43.3%, according to Kanon Bloch Carré, a fund consulting firm.
To be sure, a few fund bosses bit the bullet last year and cut their own pay. At T. Rowe Price (TROW, news, msgs), all the senior executives saw their paychecks decline 15% or more.
Dot-com-like pay package
How did Gabelli end up with so many chips? He cleverly took his mutual fund complex public at the height of the Internet bubble and negotiated a dot-com-size pay package: millions for portfolio management, plus 10% of the public company’s pre-tax profits.
Technically, his compensation isn’t salary or bonus, which for fund chief executives tends to be in the low seven figures. Rather, it is what proxy statements call “other” compensation.
Last year, according to the proxy for Gabelli Asset Management (GBL, news, msgs), it worked out this way:
$15.4 million for “conceptualizing and acting as portfolio manager of several of the open-end Gabelli Funds.”
$5.2 million for “conceptualizing and acting as portfolio manager of the closed-end Gabelli Funds.”
$12.9 million for “acting as portfolio manager and/or attracting and providing client service to a large number of the Company's separate accounts.”
$2.2 million for “providing other services, including acting as portfolio manager of partnerships and as a broker.”
$11.3 million, “representing the incentive-based management fee (which was 10% of the Company's pre-tax profits in 2001).”
Bruce Alpert, chief operating officer of Gabelli Funds, says, "Gabelli is ultimately compensated by a formula based on average assets (under management). There is no subjectivity in the process; it's completely objective."
An $8.9 million pay package at Janus
Gabelli investors were hardly the bear market’s only victims. The average asset-weighted loss at Janus equity funds was 62.7% -- worst in the industry.
And that hit Janus’s since-retired chief executive, Thomas H. Bailey, right in the bonus. It was halved last year, to $500,000. It did not, however, hurt too much for those participating in Janus’s incentive plan. From there, Bailey was paid $7.4 million.
That figure derives, according to the proxy statement of Janus’s parent, Stilwell Financial (SV, news, msgs), from Bailey’s 2001 base salary, which was $900,000. His total compensation, which also includes perks such as paid life insurance, was $8.9 million.
Legg Mason equity investors lost 38.8% of their money in the 28 months that ended in July, Kanon Bloch reckons, but the company’s chairman, Chip Mason, managed to do better. In the fiscal year ended March 31, his pay jumped 9.9%.
“Chip gets paid on a formula based on our net income,” says Lisa Spector, a senior vice president in Mason’s office. “It’s not a matter of what the markets do. Our net income for the fiscal year ended in March was our second-highest.”
The highest was the prior year; Legg Mason’s net was down 2.1% in fiscal 2002. Legg Mason’s institutional business dwarfs its public mutual funds, and largely comprises fixed-income management.
Chip Mason’s 2002 bonus of $7.3 million included $844,688 to apply toward paying off a loan the company had made to him in 1998. One condition of the loan was that Legg Mason would award supplemental bonuses sufficient to pay it off.
Pay vs. performance
Company Executive Compensation last year Equity investor returns
Gabelli Asset Mgmt Mario Gabelli $47.1 million Minus 43.3%
Alliance Cap Mgmt Bruce Calvert $12.1 million Minus 45.6%
BlackRock Inc. Laurence Fink $9.5 million Minus 52.9%
Janus Thomas Bailey $8.9 million Minus 62.7%
Legg Mason Raymond Mason $7.7 million Minus 38.8%
Eaton Vance James Hawkes $3.8 million Minus 38.4%
Federated Investors John F. Donahue $3.6 million Minus 40.6%
John Nuveen Timothy Schwertfeger $2.6 million n/a
T. Rowe Price George A. Roche $2.0 million Minus 40.3%
Neuberger Berman Jeffrey Lane $1.6 million Minus 36.4%
Waddell & Reed Keith A. Tucker $1.1 million Minus 47.1%
Franklin Resources Charles Johnson $725,425 Minus 19.6%
Note: n/a—Not applicable; bond firm.
Sources: Company filings.
The experience of BlackRock last year was not unlike that of Legg Mason. BlackRock executive Laurence Fink saw his performance bonus boosted 18.9%, to $9 million. Equity shareholders in BlackRock funds lost 52.9% in the bear market.
Actually, BlackRock's core business has been booming. More than 90% of the company's $250 billion of assets are institutional portfolios filled with fixed-income securities, including so-called “liquidity” or money-market funds. That business has benefitted handsomely from a big rally in bond prices, and BlackRock’s second-quarter profits were up one-third.
But this is cold comfort, indeed, to investors in BlackRock mutual funds, which focus primarily on equities.
Some restraint
Among more equity-heavy fund complexes, many bosses showed restraint.
T. Rowe Price Chairman and President George A. Roche took a cut in his bonus of 32%, to $1.7 million. The firm’s other top officers took similar cuts. In the bear market, Price shareholders have seen the value of their equity accounts decline an average of 40.3%.
Franklin Resources (BEN, news, msgs) CEO Charles B. Johnson forewent a bonus in 2000 and 2001, and other senior executives saw theirs slashed in the range of 70%. Value-oriented Franklin, which also runs the Templeton and Mutual Series families of funds, did the best job of any large equity fund complex in the bear market, losing only 19.6% of its shareholders’ capital.
The interest of Franklin’s boss is clearly aligned more with shareholders than management; the Johnson family owns about one-third of the firm.
Neuberger Berman (NEU, news, msgs) Chief Executive Jeffrey B. Lane’s bonus was slashed 53.8%. William J. Nutt, CEO of Affiliated Managers Group (AMG, news, msgs), took an 18.7% cut in his performance bonus.
Calvert of Alliance Capital Management saw his bonus slashed 37.5%, although that still left his total compensation at $12.1 million. Waddell & Reed Financial (WDR, news, msgs) Chief Executive Keith A. Tucker forewent a bonus last year, slashing his total compensation by 48.4% to $1.1 million, one of the lowest pay packages in the industry.
All of these compensation data are drawn from SEC filings and are required only for a public company’s five most highly compensated officers. Nothing requires public disclosure of the pay received by individual portfolio managers, such as Legg Mason superstar William Miller. Non-public fund complexes such as Fidelity and Vanguard Group aren’t required to disclose any compensation information at all. |
