Gulf News

Fund dares active crowd to prove its worth

- Mark Gilbert Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News.

Active investment managers argue that increased market volatility provides an environmen­t in which their stock- picking skills can shine. The world’s largest pension fund wants them to put their money — or rather their fees — where their collective mouths are.

Japan’s Government Pension Investment Fund, which has about 163 trillion yen ( Dh5.6 trillion, $ 1.5 trillion) of assets, is changing how it motivates its external active managers. Instead of paying them higher fees than their passive brethren as a matter of course, they will get equal compensati­on. Only if they outperform their benchmarks will the active managers see increased fees.

“Our external managers have tended to focus on getting more [ assets] from GPIF and to avoid taking appropriat­e risks required to achieve their target alpha,” GPIF said, according to the Financial Times.

Last year, GPIF had about 29 active fund managers in the fixed income space overseeing more than 14 trillion yen, and 27 in eq- uities managing about 8 trillion yen, according to industry newsletter Asia Asset Management.

The tendency of investment firms to morph into asset gatherers, where fee income is dictated by how much is managed rather than how good returns are, has been well- documented.

Fidelity Internatio­nal, which manages about

£ 233 billion ($ 330 billion), is introducin­g socalled fulcrum fees to active equity funds this month whereby it will levy more when the funds outperform their benchmark and less when returns are lagging.

Mercer, the consultanc­y firm owned by Marsh & McLennan, proposed earlier this month that active managers should compensate investors for any shortfall in performanc­e compared with their benchmarks, as well as capturing any upside above a preagreed hurdle rate.

And a study published in August by Mark Chapman of Aquamarine Funds found a sur- prisingly large number of fund managers willing to accept management fees of zero, in return for taking a larger slice of any outperform­ance.

The most typical structure was for the manager to take 25 per cent of returns once the excess had beaten a 6 per cent hurdle rate. As Chapman notes, however, a manager willing to accept zero fees typically has “some other source of income, or is independen­tly wealthy.” The costs of starting up the business and the risk of underperfo­rming in the first few years are a big deterrent, he says.

So while zero fees are unlikely to catch on, the concept of active managers only getting paid when they outperform is clearly catching on.

Of course, no one is forcing asset managers to accept the bargain offered by GIPF. They can stick with more pliant — or gullible, depending on your take — customers that don’t demand outperform­ance in exchange for fees. But the direction of travel for the industry is clearly moving towards more risksharin­g by the active crowd.

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