The Unsustainability of the "Super Boy" Development Model for Public Fund Managers

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-8-3 23:49:50
Column: Expert Perspectives
Special Senior Advisor to this publication, Mu Zi

For public funds — with their legions of fans and booming issuance — discussing the unsustainability of their development model might seem like crying wolf. But when the turnover rate of public fund managers reaches a staggering 40% this year, it is unmistakably clear: the current "Super Boy"-style development model for fund managers is unsustainable.

On the surface, public fund manager turnover is driven by personal compensation and performance pressure. As is well known, public funds charge only management fees. Compared to private funds' performance-based compensation model, the incentive mechanism is obviously less attractive. However, the management-fee-only model means a guaranteed income regardless of market conditions. The performance-sharing model may thrive during bull markets, but in bear markets it breeds endless legal and economic disputes — ultimately not a long-term solution.

Of course, some may argue that the performance-sharing model allows the quality of fund managers to be more directly reflected, enabling outstanding managers to achieve greater development. Therefore, public funds could also try adopting a similar model.

However, in the management-fee-only model, the size of assets under management serves the same reward-the-excellent-and-eliminate-the-poor function as performance income in the sharing model. Public funds enjoy an inherent institutional advantage: being legally permitted to raise capital from the public, their asset scale has an advantage that private funds cannot match. At least under the current economic, legal, and social structure, the management-fee-only model is the necessary price for obtaining this fundraising advantage. Not only can public funds not adopt the performance-sharing model, but even "sunshine-ified" private funds must adopt the management-fee-only model.

The scope of capital raising is generally positively correlated with the distribution ratio. For example, private equity funds — whose fundraising scope falls between public and private funds targeting the secondary market — generally adopt a combined model of management fees and a relatively lower performance share. If management fees are collected, then a private fund-style distribution model with performance-based sharing of up to 50% of returns is unrealistic. The immutability of the public fund management-fee-only model dictates that its internal distribution mechanism also cannot undergo major substantive changes. Therefore, the idea that public fund sustainability can be achieved by privatizing their distribution models is unrealistic.

Due to the enormous temptation of personal gain, star talent will inevitably gravitate toward private funds with their high-proportion performance incentives. For public funds, the "Super Boy"-style fund manager model will form a vicious cycle. Driven by private interests, more people will treat public funds as platforms for accumulating personal resources. Once they've extracted the personal resources they want from this platform, leaving becomes their inevitable choice. The currently adopted dual fund manager system is actually worse — it doubles the number of people on this springboard, and from a long-term perspective, they are all parasites within the body of public funds.

To break this vicious cycle, the solution is not to cultivate "Super Boy"-style fund managers but to rely on collective, team strength. What should be star-ified is not individuals but teams. The goal is to create a positive cycle where talented people take pride in being part of a star team. This is somewhat like building a "think tank" brand. Whether a "think tank" is outstanding has never been about how many "Super Boys" it contains, but about the think tank's tradition, style, and the team's comprehensive research capability.

A more colloquial example: no matter how many "Super Boys" Peking University or Tsinghua University have produced, the reputations of Peking University and Tsinghua themselves still tower above all "Super Boys."

Therefore, public funds should de-emphasize the personal branding of fund managers and highlight team style, gradually forming their own characteristics and traditions. A good fund — one capable of sustainable development — should take the path of building a financial "think tank" brand. Additionally, on the personal economic interest front, appropriate equity innovation in fund management companies, increasing core team shareholding, is also necessary.

Finally, a note on August's broad market movement. In July, the market held the 5-month MA and broke through the 1/2 line at 4159. Currently that line has moved up to 4174, while the 5-month MA has also risen to around 4130. Moreover, the midpoint of July's long bullish candle is at 4136. Therefore, the area around 4150 has become the most important position for whether the market can maintain medium-term strength. As long as the market can effectively hold above this area, it retains the ability to expand space upward. Otherwise, weekly indicators will deteriorate, and the market will at minimum plunge into a new major oscillation.

But even if the market maintains strength, this month one must beware of the killing power of a monthly K-line upper shadow caused by excessive upside overshoot. August is a critical time for macro policy to sort out its thinking, and changes on this front will play a decisive role in market movement.

Additionally, external market movements will also impact broad market direction. In a globalized world, no stock market can exist in isolation. Regarding individual stocks, the rally in first- and second-tier constituent stocks will continue, but beware of short-term oscillation risk after excessive gains. Once earnings risk is released, second- and third-tier theme stocks will find renewed momentum for activity.