Fundsters may want to brace themselves for advisor and investor questions about new research on a different kind of performance-based fees.
| Andrew Clare Cass Business School Professor of Asset Management | |
In this week's issue of
Barron's, Sarah Max
highlights research on "a symmetric fee structure" proposed by a professor in London,
Andrew Clare. Clare is an associate dean at Cass Business School, and he is a professor in, wait for it, asset management!
Clare proposes that fund firms that run active funds keep 50 percent of their funds' positive alpha (i.e. above-benchmark performance) and repay 50 percent of the difference when their funds underperform the benchmark. The professor and his folks ran Monte Carlo simulations to show that such a fee structure would, unsurprisingly, cut into fund investors' realized alpha in exchange for muting the pain of underperformance: it would smooth the ride a bit.
Barron's contrasts Clare's idea with both the old school two-and-twenty hedge fund fees and the performance-based fees used on many
Fidelity,
Putnam, and
Vanguard funds, where expense ratios can rise and fall depending on how well the funds perform. Active managers also have another kind of performance-based incentive: when a fund out-performs, net inflows usually rise, driving up the fund firm's asset-based compensation.
Paul Hession, chief operating officer of Fidelity's equity group, weighs in on the Boston Behemoth's fees that fluctuate based on performance. And
Barron's also offers comments from
Terry Dennison (U.S. director of investment consulting at
Mercer),
C.T. Fiztpatrick (founder and PM at
Vulcan Value Partners),
Russ Kinnel (director of manager research at
Morningstar),
Joseph Mezrich (head of quantitative research at
Nomura Securities, the soon-to-be new backers of American Century), and
David Waddell (chief investment strategist at
Waddell & Associates), all of whom offer critiques of Clare's proposal. 
Edited by:
Neil Anderson, Managing Editor
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