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A report out of London is claiming a lack of alignment over active management fees— but at least one mutual fund manager is hitting back, claiming that the report ignores the entire philosophy and process behind asset management.
The report, released in February by London-based consultant Lane Clark & Peacock (LCP), asserts that active fund managers are receiving more credit than deserved as markets rebound. Last year, U.K. fund managers charged their pension clients an additional $485.1 million, or an increase of 11%, in fees for returns that were largely fueled by strong markets as opposed to superior skills, according to the report.
However, Ross Ellis, Vice President of Marketing and Client Experience at Pennsylvania-based mutual fund manager and administrator SEI, disagrees. “Pensions are paying for lower volatility, and managers should be rewarded for that,” he says. Defending the fund manager side of the equation, Ellis asserts that the financial downturn has increased the demand for transparency by investors. “Managers have entered a new world where they need to be more transparent—certainly with pensions—in order to align their interests with the investor,” he says. Yet, the LCP study maintains there are structural issues with how fund managers are compensated. “We’re challenging whether managers are getting more than they deserve,” said Gavin Orpin, Head of Trustee Investment Consulting at LCP. The solution, he says, is to have a more passive fee arrangement with a fixed monetary amount that might increase in line with inflation. Performance fees should be given on long-term outperformance, not short term, he says. In direct contrast with SEI’s Ellis on the transparency issue, report author Mark Nicoll maintains that the misalignment over fees between U.K. fund managers and their pension clients actually reflects a lack of transparency, not an increase in it. Management fees, Nicoll adds, are too dependent on market beta.
It’s an argument that could continue ad infinitum, and likely will. Yet, it reflects a growing consciousness surrounding fees—and, specifically, what those fees are paid for. In a world where asset owners are being squeezed from all sides, this is a good discussion to be having. —Paula Vasan
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