Active money managers that pride themselves on adding value to portfolios increasingly are under fire to justify the fees they charge, and some have realized a refusal to budge will see them increasingly bypassed by investors.
“The value proposition of asset managers is being questioned,” said Luba Nikulina, London-based global head of manager research at Towers Watson & Co. “There are areas where many investors believe there is a possibility that, if you apply a sufficient level of skill, you can create alpha. The question is, how much of that alpha goes to the asset owners, and how much to the asset manager? Fees basically can wipe out the whole value proposition.”
Money managers covering both private and public markets said they are experiencing increased pressure from investment consultants to alter their fee structures: be it through the introduction of fee clawbacks, the scrapping of charges on committed capital, or fee reductions.
“Yes, we do see pressure from consultants — fees will always be squeezed, but equally there is a line to say, "you get what you pay for,'” said Euan MacLaren, London-based head of U.K. and Ireland institutional business at Natixis Global Asset Management. He stressed the importance of true active management, as opposed to closet indexing. Mr. MacLaren added NGAM has not altered the way it charges fees.
A recent white paper by management consultant Casey, Quirk & Associates LLC, “New Arrows for the Quiver: Product Development for a New Active and Beta World,” concluded investors worldwide will invest almost $4 trillion into “new active” strategies, and more than $1 trillion into passive and smart beta allocations, over the next five years. The consultant defines “new active” as asset classes including multiasset, unconstrained equities and real assets and other private strategies.
That will be funded in part by at least $2 trillion of redemptions from index-benchmarked active strategies. The changes will force money managers to change the way they operate and Casey Quirk said in its study that recruitment will be affected, with an anticipated uptick in talent liftouts and mergers and acquisitions to gain the necessary capabilities to remain competitive.
“There's a lot of focus on value-add — the industry is oversupplied with vendors, and increasingly you'll have dozens of similar-looking fund managers offering similar-looking products fighting over ever-slimmer organic growth in the industry,” said Ben Phillips, New York-based partner at Casey Quirk. “Investors still want active management — benchmark-agnostic, outcome-oriented active that truly isn't correlated to market gyrations. So winning the war against passive involves some value-added strategies and creative use of pricing, but the best weapon remains being a better active investor.”