Small fund companies may have an advantage over large fund companies when attracting and retaining portfolio managers because they can offer a greater equity stake, they are less bureaucratic and they give their managers greater autonomy, according to mutual fund analysts and executives.

A recent study conducted by Russell Reynolds, an executive recruiting firm in New York, examined recruiting trends in investment management and found that many successful portfolio managers are interested in joining hedge funds or smaller fund companies because of the long-term financial benefits.

"A lot of fund managers are already very well compensated and a few million dollars won't change their lives," said George Wilbanks, chief of the investment management practice for Russell Reynolds. "A lot of them are looking for equity interests." The study was conducted in November.

Smaller companies have another advantage in that they can provide a greater degree of autonomy, Willbanks said.

"If you look at what motivates a portfolio manager, it is autonomy, recognition and the intellectual quality of their work" he said. "The larger you get, the tougher it is to maintain an environment of independence."

Although large fund companies may be able to pay higher salaries than small fund companies, salaries are only one small component of the overall picture, according to Roy Weitz, a financial advisor and publisher of Fund, a website that tracks manager changes in the fund industry.

"A lot of fund managers are very well compensated and a million dollars won't change their lives too much," Weitz said. "A lot of them are looking for equity interests. Smaller companies lack bureaucracy and they have a better opportunity to provide creative compensation packages than large companies."

Warren Isabelle, formerly a portfolio manager with Pioneer Management of Boston, left the company in 1997 for those very reasons. Isabelle is now running his own fund, ICM/Isabelle Small Cap Value Fund.

"I was getting overwhelmed when the capital growth fund went from a million to 2.3 billion in the beginning of 1997," he said in a recent interview. "You recognize that when you manage, you manage certainly the firm but you tend to look at yourself as a franchise and you can never expect to get a cut out of that. We were grossing low- to mid- $20 million off those products and my cut was not even close to that. I couldn't meet the demands that I had set for myself and I didn't have a big equity stake. Smaller firms obviously are much more entrepreneurial. And cash flows accrue directly to the participants so there's no bureaucracy and no nonsense."

Had Pioneer given Isabelle greater flexibility to do what he wanted to do as well as a greater stake in the company, he may still be with Pioneer, he said.

Recognition is a key component to keeping fund managers satisfied. But, recognition presents a Catch-22 for all fund companies, Isabelle said. By recognizing star managers, fund companies keep the managers satisfied, but they are also subtly encouraging a bidding war for their talent, he said.

As a result, fund companies are using team-managed funds to insure they have adequate back up if a manager decides to leave. The team-managed approach provides adequate flexibility for the fund managers, said Bill Koehler, vice president of the Portfolio Advisory Group for American Century of Kansas City, Mo.

"I don't think our people look at this approach as a constraint," he said. "They have the flexibility to look for what's best for our investors in the framework of the fund. There is a specific set of guidelines. Here's my mandate and this is what I want to do.' They focus on their discipline. It's attractive to develop expertise in these disciplines and they tend to gravitate to one style over time."

But it was precisely these constraints that caused Isabelle to leave Pioneer.

"They need to try to reward people with equity and incentive but at the same time you want to give managers a sense of challenge and participation," said Isabelle. "The thing I think of is new challenges. Someone's been doing something for five years it gets to be the same thing. When you have to manage a fund for 10 to 15 years, you get tired of it and you want something new."

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