Pay-for-performance pricing could be the best defense against passive, low-fee rivals
Active managers can’t guarantee that they’ll outperform their passive rivals. The best they can do is bet on it — and that’s exactly what some firms are preparing to do.
The international sister company of Fidelity Investments, Fidelity International, has announced it will soon offer equity funds whose fees depend on their performance, reported the Wall Street Journal. Under the prospective scheme, investors would pay more when the funds outperform their benchmarks; otherwise, they’ll be charged a lower fee.
The mid-sized European manager also said it’s responding to new MiFiD II regulations governing the way fund firms pay for research by passing on the costs to its investors. That sets it apart from most other fund managers, which intend to take the financial hit. However, the new pricing model would reportedly still have investors paying less in total for funds that only match their benchmark.
Currently managing around US$310 billion in assets, Fidelity International joins several other managers who are flirting with performance-based pricing. Those include AllianceBernstein, a US-based firm that approached the Securities and Exchange Commission (SEC) in December for permission to launch six such funds.
AllianceBernstein said it would charge an all-in expense ratio between 0.1 and 1.1%, moving to the higher part of that spectrum if a fund delivers substantial outperformance. As an example, investors in its Large Cap Growth fund will be charged 0.6% if it manages to trounce its benchmark by 2%; if it does even better, bigger fees will apply.
If it works, pay-for-performance pricing could help stanch the bleeding that traditional active funds have suffered. Citing Morningstar data, the Journal said outflows from active US equity funds reached US$245 billion in the 12 months through July; over the same period, passively managed equity funds attracted US$283 billion.
The question is whether active managers can perform the way they need to; it will be tough, given recent history. Over the last year, around 57% of US large-cap mutual funds underperformed the S&P 500, based on data from S&P Dow Jones Indices; expanding to the last five years shows 83% having underperformed.
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The international sister company of Fidelity Investments, Fidelity International, has announced it will soon offer equity funds whose fees depend on their performance, reported the Wall Street Journal. Under the prospective scheme, investors would pay more when the funds outperform their benchmarks; otherwise, they’ll be charged a lower fee.
The mid-sized European manager also said it’s responding to new MiFiD II regulations governing the way fund firms pay for research by passing on the costs to its investors. That sets it apart from most other fund managers, which intend to take the financial hit. However, the new pricing model would reportedly still have investors paying less in total for funds that only match their benchmark.
Currently managing around US$310 billion in assets, Fidelity International joins several other managers who are flirting with performance-based pricing. Those include AllianceBernstein, a US-based firm that approached the Securities and Exchange Commission (SEC) in December for permission to launch six such funds.
AllianceBernstein said it would charge an all-in expense ratio between 0.1 and 1.1%, moving to the higher part of that spectrum if a fund delivers substantial outperformance. As an example, investors in its Large Cap Growth fund will be charged 0.6% if it manages to trounce its benchmark by 2%; if it does even better, bigger fees will apply.
If it works, pay-for-performance pricing could help stanch the bleeding that traditional active funds have suffered. Citing Morningstar data, the Journal said outflows from active US equity funds reached US$245 billion in the 12 months through July; over the same period, passively managed equity funds attracted US$283 billion.
The question is whether active managers can perform the way they need to; it will be tough, given recent history. Over the last year, around 57% of US large-cap mutual funds underperformed the S&P 500, based on data from S&P Dow Jones Indices; expanding to the last five years shows 83% having underperformed.
For more of Wealth Professional's latest industry news, click here.
