The Vinculum experiment: A lesson for fund managers

John Kenchington

The ebullient Nigel Legge’s decision to leave his role as chief executive of Liontrust in 2010 was based on a genuine feeling that it was time for a change at the top of the firm.

Formerly a co-founder of the business in 1994, he left after enacting a crisis plan to save Liontrust as it reeled from the loss of its two star managers and its assets fell from nearly £5bn to just £1bn, before leaving shortly after.

It was an example of sensible decision-making that’s lacking in other parts of the financial services industry, where embattled chief execs can cling on to hopeless positions for years in the name of vanity.

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And since he left, with a fresh pair of eyes in new chief John Ions, Liontrust has become a thriving, compelling business with a diversified selection of top-performing fund management teams.

So there’s a lesson there for the rest of the City.

Last week it emerged that Mr Legge’s new venture, Vinculum Fund Managers, was set to fold after failing to raise sufficient assets.

Vinculum was founded on the principle that it would only get paid if it performed. Aside from a small annual charge for its admin agent, the group’s Global Equity fund would take management fees only in quarters in which it outperformed, in that case taking a 20 per cent performance fee.

The trouble was that in the two years quantitative manager Absolute Return Partners ran the fund it simply failed to perform – gaining roughly 17 per cent overall versus an MSCI World index rise of 39 per cent.

This inevitably led not just to the group only raising £3m in assets, but also to Vinculum notching up severe financial losses – true to its word, it simply wasn’t getting paid.

What disappoints me about this is that I think the idea of a fund manager only getting paid if it performs is an extremely good one.

For me, the problem is that the best long-term fund managers have to be prepared to accept months, if not years, of underperformance at times as part of taking a long-term view. They can’t chase quarterly outperformance due to the threat of collapse.

So I’d like to propose a modified version of Mr Legge’s idea.

Any fund manager, in theory, could take solely a fixed subsistence charge, call it a stipend, from a fund – represented in its Ongoing Charges. It could then take a performance fee if and only if it performed in any given period.

This would allow the manager to take a long-term view, assured that the fund will remain viable in the meantime, and reap the rewards if the long-term strategy pays off later.

Any asset manager could convert one of its funds to such a format right here and now – so will any be brave enough to volunteer?