MutualFundWire.com: Beyond Two-and-Twenty: Seeking Symmetrical Comp For Fund Firms

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Tuesday, February 16, 2016

Beyond Two-and-Twenty: Seeking Symmetrical Comp For Fund Firms

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.

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