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Will active funds embrace performance-based fees?

Detlef Glow

20 Oct 2017

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A rethink of pricing models by two major players in active fund management is a potential game changer for the industry, says Detlef Glow, Head of EMEA Research at Thomson Reuters Lipper.

Recent announcements by Allianz Global Investors and Fidelity International signal a new approach by asset management firms as they attempt to fend off competition from lower-cost index-tracking funds.

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Fidelity’s move introduces a new fee structure across its equity fund range, while the announcement from Allianz covers three new funds in the United States.

They are moving the pricing of their actively managed mutual funds from a fixed management fee to a performance-based variable fee with a very low minimum fee applied in all circumstances.

AllianceBernstein also announced earlier this year that it will change the management fees for a limited number of its existing funds to a similar model.

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Sliding scale fee

These announcements are quite surprising, since they mean a complete change in the way these companies charge their clients for asset management services.

But, while AllianceBernstein and Allianz have put only parts of their income streams at risk if their funds underperform their benchmarks, Fidelity is all-in.

It is quite confident that its fund management approach is delivering value compared to an index investment, whereas Alliance and Allianz seem to want to try out the change first before they start a larger initiative in their product ranges.

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Fidelity, which currently manages around US$180 billion in assets in active and index-tracking equity funds, said its management fee, which is charged annually as a percentage of assets invested, will be set on a sliding scale.

Where a fund beats its benchmark, net of fees, the management fee will rise. If it meets or lags the benchmark, the fee falls.

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Regulatory warning

Britain’s regulator, the Financial Conduct Authority, said in a market study earlier this year that the asset management industry’s profits were persistently high and suggested the average client may be short-changed.

“We have listened to the criticism of the asset management industry and rethought our approach to charging clients,” Fidelity International President Brian Conroy said.

“In the future, we believe the vast majority of funds will charge on a variable basis as well.”

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More active competition

These moves show that active managers have started to take seriously the developments in the asset management industry, in particular the movement of assets in the direction of cheap passive solutions such as ETFs and index funds.

Even though not all active asset managers are likely to take such a move into consideration, there may be a lot of followers if these three companies are successful with the new fee structure.

In other words, this may mean the high inflows into ETFs (products that were always under cost pressure) will finally lead to a more competitive environment in the active management space.

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Client focus message

For me, this is a massive change in the global fund industry since these asset managers are really aligning their interests with the interests of investors.

I hope a number of major players will follow because it will show that the fund industry has learned its lesson and is becoming more client-focused.

But one thing is clear: to make these moves a success for fund promoters, the new fee structures must be clearly formulated and transparently applied to the funds.

And transparency might be the next issue to be tackled by active fund managers, since ETFs are bought not only because they are cheap; often they are bought because of their transparency.

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The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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