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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.
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 Gabellis 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 companys 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 companys 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 industrys 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 complexs filings with the Securities & Exchange Commission.
Investors dont know about this -- if they did, theyd be outraged, says Ric Edelman, an investment adviser in Fairfax, Va.
At companies similar to Gabellis, 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.
Gabellis 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 dont want to put money in Marios pockets, so to speak.
Gabellis shareholders pockets are half full of lint. Between the markets 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 Carr, 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 companys pre-tax profits.
Technically, his compensation isnt 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 markets only victims. The average asset-weighted loss at Janus equity funds was 62.7% -- worst in the industry.
And that hit Januss 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 Januss incentive plan. From there, Bailey was paid $7.4 million.
That figure derives, according to the proxy statement of Januss parent, Stilwell Financial (SV, news, msgs), from Baileys 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 companys 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 Masons office. Its 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 Masons net was down 2.1% in fiscal 2002. Legg Masons institutional business dwarfs its public mutual funds, and largely comprises fixed-income management.
Chip Masons 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% |
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Note: n/aNot 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 BlackRocks 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 firms 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 Franklins 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. Lanes 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 companys 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 arent required to disclose any compensation information at all.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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