Asset managers are struggling to find creative ways to address industry headwinds, including fee pressures and clients fleeing higher-revenue products, that have brought margins to recession-level lows.
A new report from Cerulli Associates highlighted the challenges managers face, from increased competition – more than 100 managers recently applied to handle a single pension fund’s mandate – to more investor interest in private markets driving away dollars. Despite the gloomy outlook, Cerulli highlighted a few players, both established and upstart, that are bucking the trend.
“Asset managers’ operating margins have shrunk from highs of 40% to lows not seen since 2008,” said André Schnurrenberger, Cerulli’s European managing director. “Innovative thinking is now crucial to success. Asset managers cannot produce the high returns their clients demand by following the crowd.”
Schnurrenberger’s team acknowledged that “innovation in a conservative industry is difficult.” Asset owners prioritize continuity, seeking to avoid disruption and potential failure, while managers that try to branch out to higher-revenue strategies like alternatives can struggle.
“Operations like ours tend to be compartmentalized with asset owners,” an executive at a long-only active equity house that is now pushing into private markets to offer alternatives like real estate said in the report. “We are not the automatic choice here; there are better-known organizations than us in private markets.”
But there are a few managers innovating well, according to the report.
Fidelity and AllianceBernstein: Performance-based fee structures
Cerulli highlighted new products from firms like Fidelity and AllianceBernstein that start with a low fee and then charge a performance-based fee for returns over a benchmark.
Other firms like $17 billion Westwood are experimenting with comparable models, Business Insider previously reported.
Aperture Investors: Reworking compensation
New York-based Aperture Investors, which was launched last year by former AB CEO Peter Kraus, takes a similar approach to fees. Cerulli also spotlighted the firm’s “novel compensation scheme” for portfolio managers, who start with “modest” base salaries but can earn up to 10.5% of total outperformance, only half of which is paid out based on the past year’s performance. The other half, meanwhile, is based on outperformance over a three-year period, which must match the outperformance in the first year. Any “unearned” compensation over that time goes back to the strategy.
“This structure is meant to control excess risk-taking: performance compensation is not paid in full unless the portfolio manager can perform consistently over three year periods,” said Matt Siegel, chief marketing officer and head of global client group at Aperture.
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AJ Bell: Slashing external fees
Other managers are re-thinking their fee arrangements with vendors to pass on the savings to clients. Online investment platform AJ Bell is focusing on lowering costs from depositories, custodians, and auditors by requiring that fixed fees don’t rise in tandem with assets.
“If we pay a fixed fee every year, as the fund size grows, the benefit of the fund getting bigger is passed on to investors,” says Matt Brennan, a fund manager at AJ Bell. “A fixed fee stops fund providers getting more money for doing no extra work.”
The firm also changed custodians after realizing that “low headline costs masked high costs to settle a trade.” Brennan cautioned that reducing costs for managers that are also custodians would be more difficult.
“We switched from BNY to RBC because they were offering much more competitive trading costs within the fund that were a better reflection of the genuine costs of trading,” says Brennan. “It’s not just about what the fund managers charge. It’s also about what the associated players charge.”