Focus Group: Different approaches to fees
Less than half of those polled for this month’s Focus Group (13 respondents, compared with 22 in the June 2014 survey) are in favour of asset management performance fees. Seven funds say performance fees are not suitable for all investment products and should only be used for hedge funds, private equity and other alternative investments.
“On balance, they align interests simply because we understand that good managers expect to be paid more for their services, and this will either be through very high fixed commissions or a combination of low fixed fees and a performance fee,” says a French fund.
Nineteen funds take the opposite view, with nine saying performance fees create perverse incentives for the manager. The CIO of a Dutch fund comments: “We would rather see manager staff investing their own money in the same fund that we invest in. Also, performance fees can too easily reward windfall gains; 2015 has yielded a lot of outperformance purely on the grounds of energy stock and bond avoidance.”
A UK fund says these perverse incentives could be mitigated through “knowing the manager, a consistent risk framework, transparency and consistency within strategies regardless of fee structure”.
Bonus-malus fee arrangements would see managers paying punishment fees following long periods of underperformance. Fourteen of those polled agree this is a good idea in principle, a significant drop from 2014 when 26 respondents agreed. Most disagree: “If the manager consistently underperforms [they] should be fired,” says a UK fund.
Regarding the best ways of exercising such ‘punishment’ clauses, 11 respondents suggest longer-term performance fees, while seven suggest fees that can be negative as well as positive. Five funds (half the number in 2014) recommend holding performance fees in an escrow account until redemption, to be used as a ‘top-up’ fund in the event of net asset value falling below its initial level. Just two approve of withholding management fees.
The CEO of one fund has a different approach: “We don’t like ‘punishment’, but we like our managers to get a fee from performance only and the idea of a bonus should be on a period of three or five years’ steady performance, not only one exceptional year.”
Funds perceive passive management, smart beta and private equity to be the best value for money, while hedge funds are considered the worst value for money. They are willing to pay the most for real estate/infrastructure and private equity strategies, and least for passive management strategies.
Half of respondents state that asset management is worse than other service industries interms of value for money and alignment of interest, while another 12 say it is about the same. Just three consider it to be better.
A UK fund has attempted to better align fees by “re-negotiating [with managers] regularly and insisting on trigger points for reducing base fees as mandate size increases. We also continue to push for full transparency of all fees.”
Two-thirds of those polled have experienced pressure from regulators or members to provide more transparency on fees, as well as reducing them. A Danish fund says they have “no other choice” but to comply, while a Dutch fund has “improved the recording of fees paid; improved the reporting on fees paid; and increased average investment per manager, thereby improving our balance in the fee negotiation”.
Nineteen funds do not accept that the asset management industry is addressing investors’ concerns about fees. “The asset management industry is not aware of the fee pressures they are under. Smart beta could take over a lot of semi-active management,” says a Danish fund.
Almost three-quarters of respondents agree that standardised fee reporting templates are a potential answer to the transparency fee problem. “More consistency and higher standards would help,” comments a UK fund.
Twenty respondents paid less than 50bps of their assets in management fees during 2015, while the other 12 funds paid between 50 and 150bps. Just over half (18 funds) have seen their expenditure on asset management fees decrease in recent years, independent of the growth of their assets under management.