In volatile market conditions, fees paid to active fund managers matter a lot more than when bull markets make it easy to make money. Many traditional fund managers are under enormous pressure to justify the active-management fees they charge. This is leading one firm, RCM, to offer clients the option of paying performance fees on its traditional global equity products.

Roger Miners, London-based director of institutional business development, says about 25% of new clients this year have opted to pay RCM based on performance, rather than a traditional percentage of assets under management. ôItÆs been a little slower than we expected,ö he says; in some cases, clients may have to call in the lawyers, while some clients donÆt want to experiment at a time when the markets are so unpredictable.

But he is confident that more clients will want to pay traditional fund managers a performance-related fee because it aligns interests. ôAs nominal returns in equities have fallen this year, more clients who had sought performance from active managers are realising theyÆve actually been paying for someone to hug the index,ö Miners says. He declined to detail what these fees are, as they are tailored by mandate or client, and may include high-water marks.

Miners says fee structures are going to count more for institutions than the current discussions about separating alpha and beta, which he deems a ôred herringö. Clients are obviously not going to want to pay for beta, but are willing to do so for proper alpha. The biggest asset class to see growth in assets is global equities, as more institutions (particularly in America) reduce home bias, and switch to specialist managers.

Some fund houses have reacted to this shift by moving into either index funds or exchange-traded funds (for the beta) or hedge funds, private equity, infrastructure and other alpha-generating products. RCM has vetoed both ideas and is trying to distinguish itself through high-conviction mandates in global equities. ôStock selection, not country or sector selection, must drive returns,ö Miners says.

The firm believes 130/30 strategies will become more popular as investors focus on restructuring fees, separating alpha and beta, and relying on traditional, fundamental-driven stock investing.

ôAlpha extension makes intellectual sense,ö Miners argues, because it allows analysts to indulge not only in their favourite stocks, but take advantage of the duds via shorting. But RCM also argues this is a æone-betaÆ product, not a hedge fund, albeit one that is suited to hedge-like performance fees. ôYou get the advantage of short calls but also transparency and the same performance-attribution tools as a traditional long-only mandate,ö Miners says, adding RCM does run long/short hedge fund strategies as well.

Active fund managers must be careful to define their goals, however, when talking about high-conviction strategies. Does this mean the manager is æunconstrainedÆ, but still competing against a benchmark, or does it imply a total return? Miners says most institutional mandates will involve the former; retail funds, the latter, particularly in Asia.

ôWe are winning global equity mandates in Hong Kong and Australia,ö Miners says. ôThatÆs the growth for our business.ö So far, however, Asian investors have not gone for 130/30. ôItÆs up to the industry to prove we can do this,ö Miners says. ôWe are looking at possible demand in three or four Asian markets.ö