Performance-related fees are nothing new, but in an investment market battered by low interest rates, the rise of robo-advisers and cut-rate index funds, perhaps it’s time to revisit the formula. Allianz Global Investors, the fund-management arm of Munich-based insurer Allianz, is launching an American pilot project in a bid to shake up the sector.
With some €500 billion under management, the German company is primed to carry out a large-scale test using new equity funds for private clients in the United States. The difference this time? Allianz will charge commission only if a client’s holdings outsprint the market benchmark.
With a portfolio of bespoke stocks, these three Allianz funds – still awaiting regulatory approval in the United States – aim to outperform the S&P 500 Index, a popular benchmark for stock performance in the US. That in itself isn’t unusual, but the basic micro-fees are. In Europe, the going commission on actively-managed stock funds is around 1.7 percent of assets. By contrast, Allianz’s new US funds will charge almost nothing – a razor-thin 0.05 percent, just to cover their fixed costs.
Investors pay a higher commission only if the fund manager scores a return on investment at least 20 percent above the S&P 500. If the fund underperforms the benchmark, the investor naturally sees less return on investment, but at least they don’t have to pay any extra fees.
“In future, we want to go after the fixed-fee model a lot more aggressively. ”
Andreas Utermann, the chief executive, is already talking up the prospects. “With most products, we will deliver a higher return” than the benchmark, he boasted in an interview with Handelsblatt.
Obviously no investment company sets out to lose money. Mr. Utermann said the new American funds, if approved, will be an answer to the long-running boom in index funds, also known as exchange-traded funds. These instruments, which attempt to match the composition and performance of a market index, are not actively managed and charge next to nothing in commission. This has proved a tempting proposition for small investors, whom Mr. Utermann wants to lure back to managed funds.
In Germany, where most mutual funds charge a fixed annual fee, Allianz’s flirt with performance-based fees is considered radical. But analysts welcomed the approach.
“It’s really a dream,” said Ali Masarwah, chief editor at the fund rating agency Morningstar. “We are absolutely in favor of this kind of model, because it means managers and investors have the same interests.” Under the traditional fee model, companies could collect their percentage regardless of performance, whereas Allianz’s structure means managers have to clock up market gains to earn money.
The idea is not entirely new: Profit-sharing models are common among large investors, and are catching on with mass-market investment products. But here, too, there is a key difference. “In most of these ones, the extra fee for beating a benchmark is simply added on to existing large annual fees,” said Mr. Masarwah.
The investment industry will be following Allianz’s new products closely. “Around the end of the year we’ll be trying out the product in the United Kingdom,” said Mr. Utermann. The company hasn’t yet decided when to roll it out in Germany, preferring to gauge the market response elsewhere first. One thing is certain: Allianz aims to shake up the market in personal investment products. As the CEO put it: “In future, we want to go after the fixed-fee model a lot more aggressively.”
"Payment for proven performance" can't be regarded a cure-all for the troubled sector.
Allianz is among the first asset-managers in the United States to offer this investment model, but the market is opening up. Alliance Bernstein, a competitor, is about to launch a similar product. “The United States is a mature market with a high degree of competition,” said Hugues Gillibert, the founder of Fitz Partners, a London research firm specializing in investment fee modelling. The general downward pressure on fees, he added, is unmistakable.
While many observers like the new “payment for proven performance” fee model, they warn it’s not a cure-all for the troubled sector. And there are various new pricing models out there.
“The details of fund construction can prove difficult,” said Chris Chancellor, a partner with Mackay Williams, a British mutual fund investor. “And a lot of investors simply don’t like that kind of fee.” Mackay Williams has never levied fixed annual charges; instead, its clients in mutual funds pay miniscule trading fees. The model is an undisputed success: The company now manages $34 billion in client investments.
For large clients of Orbis, a US investment manager, the performance-based fee is set at one-third of any return above a benchmark index of shares. And for private investors, the fee is even higher, amounting to no less than 50 percent of excess return. Reactions vary: “At first, some customers are quite shocked by that figure. They think it’s very high,” admits Dan Brocklebank, director of Orbis.
In Germany, there is another hurdle to this fee model. “Here, commission is included in the fixed annual charge, but that’s different in the United States and Britain, where investors pay commission separately, and it includes charges for advice,” explained Mr. Utermann.
Changing the fee structure won’t be easy. Maybe that’s why Allianz is avoiding the term “revolutionary” to describe its new investment vehicle.
Ingo Narat is an editor with Handelsblatt’s finance section. Brían Hanrahan and Jeremy Gray adapted this story for Handelsblatt Global. To contact the author: email@example.com