Date: 17th August 2017
As more and more investors consider passive investing (and therefore lower management fees), the question whether active funds managers can stop this migration to passive funds looms large on the horizon. As alluded to by the Financial Times in one of its recent articles, a potential solution lies in a shift towards performance fees.
In the US, only 4% of assets in mutual funds are managed through performance fees. Performance fees are considered to be a motivational force for the asset manager: the better he performs, the more he earns. It also allows asset managers to demonstrate their value to their clients. Furthermore, the client will only pay for a service that has proven to be effective. Everybody wins.
The last season of quarterly earnings in the US illustrates the need to cut active management fees and to shift towards passive management. Some fund management firms have experienced the wind of change firsthand and have started adapting. Alliance Bernstein launched the “AB performance fee series” for 6 mutual funds for which the investor will only be charged 0.05% unless the asset manager beat the index by a decent amount. In that case, performance fees could go up to 1.45%.
In the US, performance fees seem to be the solution for asset managers to keep their customers.