The issue of manager fees, still considered by some asset owners to be too high despite several years of compression, under the wider umbrella of general ‘compensation’, is about to get interesting. We’ve recently seen zero fees. Now, how about ‘negative fees’?
Luba Nikulina, Willis Towers Watson’s (WTW) global head of manager research, told the Thinking Ahead Institute (TAI) forum in Sydney last week that the industry was at the beginning of significant change.
Early last year Fidelity announced the first major ‘no-fee’ fund, which attracted significant inflows in a short space of time. Australia, which had been at the forefront of the innovation, already had no-fee strategies from BlackRock, Macquarie and Challenger. “Zero fees have entered our reality,” Nikulina said.
Certain ‘no-fee’ strategies have been offered by investment banks as one-off products over the years. A very early one in Australia was by Swiss Bank (now UBS) which launched a fund called the ‘Mirror’ fund in the 1990s, which mirrored the return of a bond index for no fee. The bank made money by betting against the index with its own active management.
“Why stop at zero fees?” Nikulina asked. “Why not pay asset owners to manage their money?” She said that the strongest incentive for managers which charged ad valorem (standard basis points) fees was to gather more assets to manage, which was not necessarily in the asset owners’ interests.
The Japanese GPIF, the largest pension fund in the world with about US$1.4 trillion in assets as of last year, introduced a new fee structure for the managers of its listed equities. This included a base fee, a “shared payout” for value creation and a mechanism to smooth the payout to the managers over a very long time horizon. A total of 48 of the 50 external managers had agreed to the new arrangement, Nikulina said.
“Successful asset management firms don’t dodge industry realities,” she said. “Book shops, travel agents and taxis still exist, but in very different formats… Coming up with one definitive answer for compensation is beyond anyone, but we have the ability to innovate. It’s about having a sustainable future.”
At the same forum TAI provided an early insight into the way the researchers and their big pension funds and other member organisations are thinking about the future of funds management.
Big changes are on the way.
TAI, which is funded separately from the asset consulting firm, was started by WTW investment chiefs Roger Urwin and Tim Hodgson in 2015. This followed their formation of the Thinking Ahead Group, which remains more closely aligned with WTW, in 2003.
TAI was formed to involve more participants in discussions on how to improve the way the investment industry works, according to Martin Goss, WTW’s head of investment consulting in Australia. It exploited the power of thought leadership, he said, connected people in order to challenge current thinking and to enable them to work together to the benefit of the ultimate investor or pension fund member. The first Australian forums, attended by asset owners and managers, were held in Sydney and Melbourne last week following one in London, where TAI is based.
Both Hodgson and Urwin emphasised the importance of culture and values in investment management – more important to the process than a view on the world of markets. Hodgson said that investment models, which the industry people loved, tended to be based on the tidy or world of geometry rather than the messy world of biology and the social sciences.
“Don’t marry a model,” he said. “Don’t get attached to a single description so that you get blinded to a model’s imperfections… Good is good but optimal is not necessarily better. Optimisation can be so finely tuned to the underlying assumptions that only a slight change can have a big impact. Things change. Short-term trends don’t go on forever but long-term reversion is not guaranteed.
Urwin described the “renaissance investment professional” and what motivated him or her. An organisation’s culture was very important to motivation. Intrinsic motivation included autonomy, mastery (the challenge of being good at your job) and purpose (doing something which is bigger than ourselves or in the interests of others). Extrinsic motivation included work environment and compensation.
“The investment professional of tomorrow will be skilled in both the old and new ways,” he said. “They will be higher performers because they will use technology successfully. And he or she will be a very strong team player.”
The team element to a successful organisation was developed at the forums by Marisa Hall, a senior consultant in the Thinking Ahead Group, who quoted Thomas Malone of the MIT Centre for Collective Intelligence: “Almost all important problems are solved by groups of people.” Cognitively diverse groups had higher collective intelligence, she said. But there had to be a systematic approach to inclusion to reap the benefits.
An interesting challenge to all these thinking people was thrown out by another industry thinker during question time. Graham Hand, the editor and publisher of Australia’s own Cuffelinks investment newsletter, said that in his experience a lot of successful investment management firms were run by a person who might be a very talented investor but often “not nice to work with”. It was, basically, that person and a group of “helpers”. He wondered whether they tended to be more successful than those based on a collaborative model.
You could almost see the audience thinking about exactly the sort of people who Hand was describing. There are a lot of them. But according to Goss, the classic star system for investment managers on which many boutiques have been successfully based, was unlikely to be successful in the future.
Greg Bright is publisher of Investor Strategy News (Australia)