Although incentive-based fee structures could mitigate outflows in the short-term, they could result in lower revenue and increased earnings volatility for the traditional managers that provide them, according to analysis from Fitch Ratings.
Large U.S.-based traditional active asset managers that adopt this incentive-based or fulcrum fee structure would have to significantly improve future performance to maintain current margins and cash flow leverage, Fitch's research showed.
Managers that have offered fulcrum fund structures have experienced weaker fee generation because they've been unable to consistently deliver the returns needed to charge higher fees.
Citing data from a study by Dimensional Fund Advisors, Fitch reported that only 21% of U.S. active equity and 36% of active fixed-income strategies outperformed their benchmarks from 2008 to 2018 regardless of fund fee structure.
Between 2016 and 2018, passively managed equity strategies experienced more than $672 billion of inflows, vs. the $664 billion of outflows of from actively managed strategies over the same period. Performance is still what mainly drives flows.
"Fitch understands the motivations for offering fulcrum funds as a means to stem asset outflows and better align investment managers' compensation with the returns they deliver for investors," said a news release issued by Fitch announcing its findings.
And while incentive fees are standard practice for alternative investment managers, the difference is that alternative investment managers also earn a meaningful fixed base management fee, typically 1% to 2%, while the fulcrum fee structures offered by traditional investment managers could result in low base management fees.
