// WETENSCHAP EN PRAKTIJK
NEW FEE MODELS IN ASSET MANAGEMENT? By Jens Pongratz
Is the time ripe for new fee models in the asset management industry? Some asset managers and investors seem to think so and have started introducing alternatives. Aligning incentives between investors and asset managers has been a longtime challenge. The latest, potentially industry-disrupting attempt that has been making headlines since the beginning of the year comes from GPIF, the USD 1.5 trillion Japanese Government Pension Investment Fund.
Photo: Archive Corestone Investment Managers
GPIF has introduced a new fee model that distinguishes between times of underperformance, when external managers receive a low ‘passive’ fee (equal to the fee for a passive mandate), and times of outperformance, when
NUMMER 5 / 2018
managers get a fixed share of the alpha produced, typically called a performance fee. There is no upper fee limit, but only 45% of performance-based fees will be paid out each year, and 55% will be carried over to the following year. To additionally emphasize the long-term investment horizon of GPIF, the fee model and contracts are valid for a full business cycle so that managers can apply long-term investment views without the fear of being fired for shortterm underperformance. GPIF has only recently made its fee structure public1. The pension fund explains in detail how it came up with this specific structure which, in the fund’s view, seems to best align the incentives between the investor and asset manager, while at the same time not being overly complicated. GPIF states they are aware of the potential effect their fee structure could have on the asset management industry as a whole by committing it truly to longterm investment performance – and not asset gathering or closet indexing. For GPIF, this is important also from another point of view: with 80% of the portfolio being passively invested, GPIF is heavily dependent on passive management and efficient capital markets are a prerequisite. Asset managers focusing on alpha make markets ultimately more efficient, thereby GPIF hopes to achieve two goals: improve the results and quality of their active and passive investments.
GPIF has introduced a new fee model that distinguishes between times of underperformance.
Not all details about the GPIF fee structure are public and some questions remain: given the focus on the long term, after what period can managers be terminated? Additionally, how precisely is the performance fee determined? Interestingly, the broader discussion in reaction to GPIF centers firstly around the timeframe: can a full business cycle (say, five to seven years) actually be aligned with the supposed shorttermism of many investors? Apparently, firing a manager after one year of underperformance is not uncommon, so longer-term contracts might not seem attractive to investors. Asset managers seem to use this argument to stick to current fee models, saying they would love to offer such a fee schedule, but unfortunately, their clients would not agree to these terms!