Paying investment managers just performance-related fees is an enticing idea, but its implementation does not always result in the intended alignment of interests between investors and fund managers.
That's the warning from one of Hong Kong's largest public sector pension funds.
“The way you structure performance fees might affect the performance behaviour of fund managers because their income is based on such performance,” Doris Ho, executive director of Hong Kong's Hospital Authority Provident Fund Scheme, told AsianInvestor in an interview last month. “You need to decide on process by which you assess performance because there are multiple ways of doing that and each one affects manager behaviour in a different way.”
It could also lead to more variability in expense ratios: in a year when funds don’t perform well, the expense ratio will likely fall, but in a good-performance year the expense ratio could shoot up, she pointed out.
Currently, the expense ratio for HAPFS is around 50 basis points (all inclusive), Ho said.
Ho acknowledged that it’s disappointing to pay managers when they don’t perform as expected or underperform.
Currently, HAPFS pays most of its external managers a base fee, which is paid irrespective of whether they perform well or not. Some managers are paid a performance fee as well, in which case the base fee would be a little lower than for those managers with similar mandates who are paid only base fees, she said.
Ho added that introducing a fee structure by which assets managers don't get paid if they underperform but face a fee cap if they do outperform was unlikely to sit well with asset managers.
She was not referring to any particular institution. The new fee structure of GPIF, Asia's most famous advocate of the model, is not thought to include a maximum rate.
What's clear, nonetheless, is that with active fund managers facing rising performance and cost pressures as interest in passive investment vehicles boom is that the debate over performance-only fees looks set to continue heating up.
In October last year, global fund manager Fidelity said it would overhaul its fund fee structure, linking it at least in part to how well a fund performs.
Closer to home, Singapore-based Aggregate Asset Management is another advocate of the performance-only fee principle: starting with just S$3 million ($2.2 million) in 2012, the fund house has since garnered about S$500 million ($374 million) in assets under management.
“Based on our current growth trajectory, we expect our AUM to grow to between S$1.5 billion and S$2 billion in five years,” Kevin Tok, executive director of the fund house, told AsianInvestor.
The fund house follows a zero management fee model, making money from performance fees only. “When clients make absolute profits, we earn 20% of the net profit,” Tok said.