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ABP backs calls for asset manager penalty clause

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Dutch public sector pension fund ABP has said it backs plans by PFZW, the care and welfare sector pension fund, to see “punishments” built into contracts with asset managers, to trigger a fall in fee levels if the managers underperform.

Europe’s largest pension fund said that it supported the idea that compensation to external managers outside APG should be “balanced”. Its statement follows remarks from PFZW’s director Peter Borgdorff – published in Dutch newspaper Financieele Dagblad – that sustained underperformance of mandates should have financial consequences.

“ABP wants to work together with PFZW to see whether a change can be made,” the fund said.

However, it pointed out that a move towards penalising poor performance was not without potential drawbacks.

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“We recognise that there are risks to enforcing such a punishment regime,” it added.

“For example, asset managers might not want to work with you any more, or being strict on the downside could mean asset managers will want to earn more on the upside.

The fund added that such considerations were already taken into account
in existing contracts agreed between ABP and outside managers, it said.

“The contracts provide for performance fees to cover returns over a period of years, so years of bad performance should be compensated before a manager is eligible for a performance fee.”

Concerns that managers may be deterred from taking on mandates due to punishment clauses were shared by Michel Thomas of PensPlan Invest.

The fund director, whose scheme is responsible for regional public pension schemes in Italy’s South Tyrol, told IPE:  “Penalising will be difficult to implement because managers will in future not be so keen to get this kind of mandate.”

ABP also questioned whether penalties were the best potential solution to the problem.

It said: “Punishing managers is not necessarily the best way to strike a balance – good alignment might be better.”

To ensure an alignment of interests between ABP and its external managers, general partners were expected to invest their own money alongside the pension fund, resulting in losses for the GP if investments underperformed, the scheme said.

“We are smarter investors than some people would like to portray us, and we are aware of all dynamics in dealing with external managers,” the fund said. “There are many factors to take into consideration.”

It further said that as fees were related to outperformance of targets, managers needed to do more than “surf on the high tide of a bullish market.”

Thomas also suggested that prior to imposing penalties on managers, pension funds could take other measures.

These could include heavy criticism during a trustees’ meeting, removing part of the funds from a manager’s mandate, or not investing new monies with them.

 “Managers who underperform for a long period will have a serious problem in their investment strategies,” Thomas added.

“So maybe they will start to improve when they are put under heavy pressure – for example, with personnel changes.”

But he concluded: “In any event, I would rather take the money away.”

Readers' comments (1)

  • To me and to DEAS Property Asset Management it makes total sense that underperformance should have financial consequences - just as it makes sense that overperformance is rewarded. In fact, I would like to take it a step further:

    The asset management market - at least in Denmark - has been much too one-sided for quite some time, and some asset managers have been overcompensated just by riding the general market movement and regardless of downright appalling performances.

    Over- or underperformance should be measured against the market when adjusted for general trends.

    Our fee strategy is to have a base fee that is fixed on only a slight mark-up compared to a cost-recovering basis and only if we are able to prove our capabilities should we get more that this base fee.

    I strongly believe that this is where the maturing market is going anyway.

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