The growing strength of popular investment markets has put increased pressure on investment managers to produce new fee models that offer more attractive returns to investors and protect the industry against intervention by the regulators, according to a new white paper by Australian investment manager Remerga.
The white paper, ‘Fee innovation in investment management overdue’, calls for a fresh approach to innovative free structures as the total cost of investment management rises, despite a drop in the average headline fee rate.
Chief Investment Officer at Remerga, Craig Mercer, said that the typical fee structure is skewed and that managers are incentivised to take less risk and aim for index-like returns.
“The common practice of charging management fees based on asset size is deeply entrenched in the industry but the practice does not take into consideration the time horizon of the investment,” said Mercer.
“For an asset manager, the stability of the capital base is a valuable tool. It allows the manager to not only build a more sustainable business but, crucially, it allows for longer-term investment decisions.
“Current practice does not reward the longevity of committed capital. Given the clear advantage that a long-term investment horizon offers, it would seem logical to encourage long-term capital commitments. Longevity of capital should be rewarded over and above size.”
The lack of innovative fee structures is proving to be a global issue, with a report by the UK’s Lane Clark & Peacock (LCP) revealing that the asset management fee for a £50 million active global equity mandate has increased by 70 per cent since 2011.
If the industry does not innovate and improve new fee structures, there is a chance regulators will intervene and impose changes. The LCP report discusses the UK’s Financial Conduct Authority (FCA) review of the UK wealth management industry, particularly the recommended changes to fee structures made by the regulator in its interim report.
According to the report, the FCA is taking a firm stance against the investment management industry, saying that industry margins are too high, investors don’t get any scale benefits, some active managers are not truly active and transaction costs are not transparent. Remerga aims to provide fee structures that address the growing trend of regulator intervention here in Australia.
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“Our solution at Remerga is to introduce a fee structure that rewards investors for making long-term investments. Investors in our Emerging Markets Sustainable Leaders Fund will have their fees reduced after three years and then again after six years,” said Mercer.
“Under this performance fee option, the management fee is 0.45 per cent a year for the first three years, dropping to 0.4 per cent in years four and five, then dropping further to 0.35 per cent in year six and onwards.
“The performance fee is 10 per cent of the net excess return above the MSCI Emerging Markets (Net) Index and all additional expenses, with a high water mark,” he said.
About Remerga
Remerga was established in 2015 with the vision to improve the links between risk and return in the emerging markets. Through a focus on governance and sustainable investing, they not only mitigate their impact on the environment but can generate superior returns while taking less risk. It is their commitment to provide investment products with a deep emphasis on sound corporate governance and sustainability; at attractive fees.
The co-founders Craig Mercer & Warwick Johnson, between them have over 50 years of experience in the asset management and consulting industries. The firm has seven dedicated professionals and a board of industry veterans.
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