Portfolio managers of mutual funds paid bonuses for high yields
System encourages risk-taking
|
|
A large portion of the earnings of portfolio managers of Finnish mutual funds is in the form of profit-based bonuses.
According to a study by Helsingin Sanomat, the proportion of such bonuses could amount to as much as half of the portfolio managers' personal earnings.
The system contains an incentive to take plenty of risks, because high yields bring fat bonuses for the portfolio manager, while it is the investors who pay for failures.
Helsingin Sanomat learned that most equity funds reward their portfolio managers in largely the same manner. Bonuses are paid once or twice a year, and they usually constitute a large proportion of the managers' annual income.
In the system used by most investment funds, the portfolio managers earn bonuses if the investments yield more than the comparative index, or if the yield is higher than that of competing funds.
A high yield on investments alone does not necessarily bring a bonus, unless the yield exceeds that of the competitors. The managers are not necessarily rewarded for operating in a bull market.
Conversely, portfolio managers can also be paid bonuses if the value of investments falls - as long as the decline is less steep than the market average.
The system can lead to a conflict of interest between investors and their portfolio managers, with the former often seeking a safe long-term investment, and the latter looking for opportunities for short-term profits.
Helsingin Sanomat
