Mutual Fund Director Compensation: The 2018 Management Practice Annual Survey. May 17, 2018

Transcription

1 Mutual Fund Director Compensation: The 2018 Management Practice Annual Survey May 17, 2018

2 Introduction The Mutual Fund Directors Forum (MFDF) is an independent, nonprofit organization that serves the independent directors of U.S. mutual funds. Management Practice Inc. (MPI) has been an active adviser to mutual fund directors and their counsel since

3 Today s Speakers Carolyn McPhillips (Moderator) Meyrick Payne Jay Keeshan Sr. Counsel, Mutual Fund Directors Forum Sr. Partner, Management Practice Inc. Partner, Management Practice Inc. 3

4 Agenda Part 1: Survey Methodology, Director Demographics, Industry Statistics Part 2: Setting Director Compensation/Director Compensation Data Part 3: Other Compensation and Governance Practices Part 4: Cost of Fund Governance and Comparison to Corporate Board Compensation 4

5 Setting Trustee Compensation Properly is Important for Many Reasons Must be fair to shareholders Must be fair to board members increasing workloads, duties and exposure Necessary to attract/retain high quality trustees Regulatory impact/optical considerations Industry growth (AUM, distribution channels, use of sub-advisors, new products (e.g. ETFs), complex investments (e.g. derivatives) Process, process, process 5

6 PART 1: Survey Methodology, Director Demographics, and Fund Industry Statistics 6

7 Survey Methodology 403 Boards 1973 Trustees/Directors 50+ Surveys Public filings/sais, Morningstar, ICI 7

8 Director Demographics 2,200 fund directors overseeing about $19 trillion AUM Average/median age 67/67 (up recently) Retirement age has shifted to 75 Tenure: average 11 years, median 10 years Approximately 20% of current directors and 31% of incoming directors in 2017 were female. 8

9 U.S. Mutual Fund Industry in 2017 Director compensation was up 4.2% while industry assets were up 14.7%. The number of funds was down 1.4%. Average Rate of Director Compensation Growth 4.2% Fund Assets ($18.7T) 14.7% Number of Funds (8,066) -1.4% Source: Mutual Fund NSAR Filings (Trustee Compensation and Expenses); ICI Trends in Mutual Fund Investing (change in fund assets and number of funds). 9

10 PART 2: SETTING DIRECTOR COMPENSATION/ DIRECTOR COMPENSATION DATA Source: Statistical data from MPI surveys, corporate proxies, and US Government/SEC filings 10

11 Recent Headlines 11

12 Level 1:Traditional Approach AUM and Fund Count Description/method: Comparison to industry wide cohort data Minimum of two/both metrics recommended Look at median of AUM and fund count categories for indication of appropriate level Caveats: Descriptive, not prescriptive, more appropriate for review vs. setting Wide range within categories Could be problematic if at the higher or lower end of both categories Could be misleading/not always rational (i.e. an increase in AUM could indicate a decrease in pay) Does not take into account specific/unique features of each board s duties 12

13 Median Total Director Compensation in Total Assets Governed Total compensation rises with increasing asset levels. Assets in Billions $287,500 $316,000 $210,000 $132,500 $53,000 $84,500 $8,000 Less than $1B $1B-$3B $3B-$10B $10B-$25B $25B - $50B $50B-$100B Greater than $100B 13

14 Median Total Director Compensation in 2017 Number of Funds/Portfolios Governed Total compensation increases as the number of funds/portfolios governed grows. Number of Funds/Portfolios $256,792 $293,500 $330,000 $171,250 $61,500 $89,000 $12,400 1 to 3 4 to 7 8 to to to to Funds and up 14

15 Level II Peer Selection and Comparison Sample Board Peer Group -- Data as of December 31, 2017* Description/method: Select group of 8-12 peers based on AUM and fund count When possible skew toward insurance, subadvised funds, etc. NOT 15(c) peers Run median, other percentiles Aggregate pay If comfortable with peer group, can be useful comparison for chair fees, meetings, other issues Fund Board Approx. Assets ($bil.) Approx. #Funds/ Portfolios Median Total Director Compensation (2016) Median Total Director Compensation (2017) % Change Sample Board $30 40 $157,250 $162, % Selected Peer Group Peer A $60 55 $225,000 $235, % Peer B $32 47 $164,280 $172, % Peer C $19 29 $110,000 $125, % Peer D $36 17 $198,600 $205, % Peer E $52 50 $212,750 $218, % Peer F $28 60 $151,400 $162, % Peer G $46 24 $148,750 $168, % Peer H $34 18 $184,700 $198, % Peer I $17 52 $152,300 $164, % Percentile 25 th $28 $24 $151,400 $164, % Percentile - 50 th (median) $34 $47 $164,280 $172, % Percentile 75 th $46 $52 $198,600 $205, % Mean $36 $39 $171,976 $183, % *Data is fictitious; for illustrative purposes only 15

16 Level III: Degree of Difficulty/ 4 Dimensions of Complexity Structural Complexity Distribution platforms Number of sub-advisors New fund activity Product Complexity Fund count Fund types (OE, CE, ETF, Alloc. Muni, MMKT, etc.) Share classes Investment Complexity Investment categories Alternative funds Other (tax strategies, securities lending, etc.) Organizational Complexity AUM Number of sub-advisors Legal activity 16

17 Type of Compensation for Committee Service Most boards pay at least some form of compensation for committee service, as the importance and workload of committees increases. In particular, there has been a greater tendency to pay committee chairs, with 85% of boards paying at least some form of chair fee. No Compensation 8% Meeting Fees Only 4% Retainer Fees Only 3% Retainer and Chair Fees 9% Retainer, Meeting Fees and Chair Fees 10% Meeting and Chair Fee 14% Chair Fee only 52% 17

18 Average Committee Chair Fees Committee chair fees vary among fund and committee types often depending on asset size and fund complexity. The following chart depicts the range and average fee paid to each committee chair. Some of the larger complexes that have higher committee fees also may be the funds that have additional committees for areas such as investments, causing the average to be higher than audit, where 100% of boards have committees. $80,000 Average $56,000 $60,000 $50,000 $65,000 $21,941 $19,667 $14,997 $13,419 $275 $250 $500 $1,000 Audit Nom.and/or Gov. Compliance Investment Contract $23,954 $5,000 18

19 PART 3: OTHER COMPENSATION AND GOVERNANCE PRACTICES Source: Statistical data from MPI surveys, the Investment Company Institute and US Government/SEC filings 19

20 Board Independence 84% of directors on participating boards are independent ( disinterested in legal parlance). Over 88% of boards comply with the SEC s formerly proposed Super Majority rule requiring 75% independent directors. % of Independent Directors on Board 16% 84% Insider Independent 20

21 Board Leadership 66% of fund boards are chaired by an independent director, up from 60% ten years ago. While 34% have insider chairs, 23% also have a lead independent director. 11% Independent Chair 66% 23% Insider Chair and Lead Independent Director: 23% 66% Insider Chair Only: 11% 21

22 Average Number of Scheduled Board Meetings The majority of boards meet 4-5 times a year, but some meet up to 8 times or more depending on the size and complexity of the complex. Additional meetings are often called due to particular events such as fund introductions/mergers, regulatory issues, or market crises. 12 Asset Managers by Size Average 0 < $10 bn $10-$50 bn $50-$100 bn $100+ bn 22

23 Length of Board Meetings 58% of board meetings last more than 1 day, reflecting the need for additional time to cover extended agendas and complexities. Board Meeting Length % of Meetings More Than One Day 80% 28% 70% 20% 22% 20% 60% 50% 10% 40% 30% Less than 1 Day 1 Day 1 1/2 Days 2 Days 2+ Days 20%

24 Board Committee Detail All boards have an audit committee, most have governance and nominating committees and many have an investment and/or compliance committee. There has been a notable increase in the number of governance committees and investment committees in response to changes in the market and industry. Percent of participants with each committee 100% Audit 77% Nominating and/or Governance 25% Investment/Performance 26% Pricing/Valuation 20% Compliance 17% Contracts 12% Executive 4% Brokerage/Portfolio Trading 4% Proxy 3% Risk 3% Marketing/Distribution 2% Operations * Does not add to 100% due to non-exclusive nature of committees. 1% Ethics 24

25 Board Retirement Age Mandatory retirement ages continued to rise in % of participating boards have a mandatory retirement policy, with 75 now overwhelmingly the most commonly reported retirement age (75%, up from 37% two years ago) after remaining at 72 for many years. 11% have retirement ages above 75. Approximately 5%-10% of boards have an emeritus program. Mandatory Retirement Age (for boards that have them) 80% 75% 70% 60% 50% 40% 30% 20% 10% 0% 11% 7% 2% 4% 1% <

26 Number of Independent Board Members per Board Merger activity can cause wide variability in head counts (sometimes up to 15 members or higher) as boards combine and consolidate. However, the majority of fund boards have three to six independent members. 22% 14% 15% 13% 10% 9% 13% 4% 1-2 Members Members 26

27 Findings on Independent Fund Director Demographics The median director age was 67 the average was 67 20% of current and 31% of new independent directors in 2017 were female 66% of directors served on other corporate, charitable or non-profit boards 11% served on other mutual fund boards down from 19% in % are retired from their primary profession 3% of independent directors had been employed in the past by the complex for which they currently serve 27

28 PART 4: Cost of Fund Governance and Comparison to Corporate Board Compensation 28

29 Corporate Board Compensation Corporate Board Median Total Compensation Number of Independent Directors Aggregate Board Pay Apple $382,884 7 $2,783,585 Citi $310, $5,353,320 ExxonMobil $336, $4,375,227 General Electric $310, $6,260,846 IBM $342, $5,011,022 J&J $319,893 9 $2,784,037 JP Morgan $402, $4,594,250 Morgan Stanley $348, $3,598,748 Verizon $315, $3,562,109 Walmart $288, $2,734,127 Data is approximate and findings may differ due to varying reporting standards and other factors. 29

30 Total compensation for all independent directors represents a fraction of a typical fund s total expenses. Board Compensation Compared to Total Expenses for Typical Equity Fund for $1 million in Assets Total Board Compensation $16.17 Total Expenses with a.75% Expense Ratio $7,500 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 30

31 QUESTIONS? DEADLINE FOR CCO COMPENSATION SURVEY: June 1, 2018 Management Practice Inc. 216 West Hill Road, Suite 200 Stamford, CT Phone: (203) Contact: Meyrick Payne Jay Keeshan