James Packer buys in, page-23

James Packer's Contango play could be a game-changer for funds management
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Contanga Asset Management chief investment officer George Boubouras.
Contanga Asset Management chief investment officer George Boubouras. Paul Jeffers
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by Jonathan Shapiro
In funds management, where people and performance are everything, James Packer's latest deal is highly unusual. Mr Packer's $13 million investment in Contango Asset Management demands that certain key staff at the Melbourne-based boutique accept that they will not be paid bonuses, and instead take equity stakes in the business.
It's a model that George Boubouras, the fund's chief investment officer who led the management buyout of of Contango that Mr Packer and his chief aide Rob Ranking have backed, hopes will serve as a template to better align the interests of staff, owners and clients.
He suspects they may be forced to do it anyway, as large institutions such as sovereign and pension funds demand changes to the way fund managers and their staff reward themselves.
Mr Boubouras, who previously worked at UBS' wealth management arm, told The Australian Financial Review that 12 out of 21 key staff are locked up between five and seven years and have forgone bonuses in favour of equity stakes in the new Contango business, which will relist later this year.

The rationale is two-fold. One is that it will shift the focus of staff from the short-term to the medium- and longer-term. The other is that profits, which will be distributed to shareholders, will be significantly larger if the biggest expense of the operation – staff – is slashed. That means the multiple the market assigns to the business should be higher.
"The bulk of the NPAT [net profit after tax] goes straight to the bottom line," Mr Boubouras said.

"The equity owners won't benefit unless there is consistent long term performance. This will de-risk the portfolio and deliver equity to the investment team. It will lead to better aligned remuneration models going forward."

Mr Boubouras also says the model will allow the fund to employ more compliance and legal staff to better manage operational risk. In other words, it's the kind of governance fund managers demand of the management and staff of the companies they invest in.
"We believe this type of structure will prevent fund managers from taking risk positions with something like a Slater & Gordon. When you look at it, it was quite binary outcome. You want to make sure the investment process and remuneration is linked to the risk position of the fund in medium and long term."

A vital sector
The funds management sector is likely to have attracted Mr Packer and Mr Rankin for several reasons. One is Australia's large and growing pool of pension assets, which makes funds management and important and sustainable growth sector of the economy.
The other is the powerful scale that can be achieved. The costs of managing $10 million of asset isn't that different from managing $1 billion, or even $10 billion, but the profits grow exponentially. Asset managers are capital-light businesses with staff costs accounting for the largest expenses.

Analysis of listed funds Magellan, Platinum, BT and Perpetual shows that staff costs account for 40 to 60 per cent of operating expenses.
The profit potential in the industry has been masterfully exploited by Magellan and Platinum, ASX-listed global equity funds whose ability to attract billions of investments have made the founders amongst the wealthiest in the country.
In five years Magellan has grown its management and performance fee revenue by 18 times from $13 million to $246 million while expenses have only increased by 5.5 times to $49 million. Platinum, meanwhile, has grown its management fees from $267 million to $360 million over that period (it generated a modest $40 million in performance fees) while expenses increased modestly from $50 million to $59 million.
Mr Boubouras says the fund is trying to emulate some aspects Magellan – which was initially backed by James Packer. Contango, which, unlike Magellan, focuses on domestic stocks, will also relist via a backdoor float. He also wants staff to feel like owners from the start, and it has plans to add to an active exchange traded product to its existing listed investment company (LIC) to attract more retail capital.
There are other ways to successfully align investors and fund owners. A small handful of Australian hedge funds have a large portion of their net wealth invested alongside their clients in the funds they manage, creating a strong alignment.
But in Australia and offshore, hedge fund and asset managers have been able to amass enormous billion dollar personal fortunes by gathering assets, charging hefty management fees while keeping operations light. The founders and owners of investment firms are among the nation's richest.
Prior successes
Mr Boubouras said the model has worked well in the past for some Australian investors with sound reputations and track records. They have been able to open their doors and win a handful of large mandates from wholesale institutions. But he says this game is becoming tricker.
Institutions, such as industry funds, have become more demanding as they focus on governance, incentives and remuneration.
The pressure on fees being placed by Australia's largest institutions is said to have led many large asset managers to not bother chasing assets down under.
But Mr Boubouras says it will present an opportunity for funds to "successfully export the concept of lower investment management fees to the rest of the world."

Boutique funds with a concentrated wholesale client register also run the risk that dips in performance, key staff departures or unexpected mandate losses could mortally wound their business.

That increases the attraction of diversifying into the retail market to thinly spread sources of revenue.

The trend is evident in all areas of finance and business. The market is placing greater value on sustainable, predictable earnings
"It's a global phenomenon – responsibility, messaging, alignment and trying to be as predictive and consistent as you can be," Mr Boubouras said.
"If you worry about the client first, second and third everything else will fall into line."

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