Diary of an Investor: Player and dealer
I caught up with an old pal at the IPE Awards in Monaco in early December. As a previous IPE winner, we at Wasserdicht Pension Funds were invited to a special reception to celebrate the tenth anniversary of the awards. But beforehand, Pim and I met for an aperitif.
Pim now runs the fiduciary management team of a global consultancy. As we discuss life and our jobs, he tells me his firm has been looking at the issue of performance-related fees for asset managers.
‘You should think twice about using them,’ Pim warns. ‘Aside from being an incentive to take the wrong kind of risk, they can work out heavily in the manager’s favour in some circumstances, and can introduce some perverse incentives. We are very careful about them.’
‘I am aware of that,’ I counter. ‘It’s not always a one-way street and we do look closely at the remuneration. We use performance fees in some cases but not in all.’
Bob comes to join us. Bob has pitched to me many times over the years, each time from a different asset management company. ‘What’s up guys?’ asks Bob, clasping our hands warmly.
‘Discussing performance fees,’ says Pim. ‘Want to join us?’
‘A tricky problem,’ says Bob reaching for a bowl of nuts. ‘We don’t like them. Some might people say that’s because we don’t want to eat our own cooking but we say why should you pay us more for doing what we’re supposed to do? We always play fair on that score.’
I ask Pim. ‘Pim! What do you do for pension funds as their fiduciary manager?’
‘Well Piet, that depends on the client. As a fiduciary manager we act according to the client’s wishes, and usually that involves a performance-related fee.’
‘So you apply a performance fee for fiduciary management clients at the portfolio level but not at the level of individual managers?’
‘That’s about it. We like to be remunerated at the total portfolio level, but some decisions about remuneration of underlying managers are best left to our judgement. That’s why we’re appointed the fiduciary.’
I look at Pim and Bob. ‘So far so good. At Wasserdicht Pension Funds we want to implement a programme of five-year rolling performance fees. There’s a manager incentive but the interests of both sides are taken care of so everyone should win. Fair’s fair, no?’
Bob has finished his nuts and is standing up. ‘Just spotted a client,’ he says. ‘Catch you later’.
I turn to Pim. ‘Would you offer me a five-year rolling performance fee if I become your client?’ ‘Great question, but I’ve just noticed I’m late for dinner,’ he responds.
Not a bad business those guys are in, I think as I pass the casino on the way to dinner. Just like the casino, the consultants and asset managers seem to skew the game in their favour every time.
Pieter Mullen is investment director at Wasserdicht Pension Funds