Many investment firms in the West have come to terms with the fact that they have a cost problem and must show sceptical investors that they are doing all they can to lead a profitable life without the crutch of fat pay cheques and business lines. Hence they announce layoffs in a bid to contain costs and stem the bleeding.
But the irony is that a large proportion of these job cuts are rather short-sighted. They trigger a severe loss of confidence from all-important institutional clients, who take their monies away, spurring tit-for-tat asset outflows. As the gravy trickles out, the firm facing such a precarious situation could be pushed towards laying off more skilled investment personnel.
The firm becomes entrenched in a vicious circle of job cuts and asset/client defections. This hurts staff morale hard and productivity is inevitably affected. Now I’m not saying that restructuring should never take place. Taking the painful medicine for a better tomorrow can work, albeit with adequate planning, astute guidance from a visionary management, and sufficient communication to stakeholders. But the crux is that firms should guard against trimming rampantly for cost’s sake, without genuinely rationalising and sizing up the consequences of their actions.
The repercussions of such layoffs can be deadly. I know of institutional clients who have termination-of-mandate frameworks whereby the departure of the majority of a firm’s key investment personnel will automatically lead to a termination of a mandate. The institutional client will immediately withdraw potentially hundreds of billions of dollars in one go. This is an ugly scenario for the investment firm. An immediate termination could also stem from strategy problems, a below-break-even level of assets under management, business continuity issues, substantial merger and acquisition changes, or headline reputational risk.
In addition, unintended consequences happen when new people come and go. For example, the investment process of a firm may get diluted and the team’s brilliant past performance may not be replicated or sustained. I knew of an asset management firm who, following a change of the chief investment officer in 2008, put in place a new investment process for their equity strategy.
Whereas previously investment decision-making was centralised with the chief investment officer, portfolio managers were now each responsible for making bottom-up investment calls that fed into the portfolios. Further, the retrenchment of a senior equity analyst responsible for regional equity research adversely impacted the firm’s research coverage of Asian companies. For 2008, the portfolio underperformed its benchmark massively, with stock selection the main detractor of performance. My advice for investment chieftans: don’t do something too hastily that you might live to regret.
The author is a fund-of-funds manager in Singapore.