Active fund managers need to reconsider their fee structures in order to compete with increasingly popular passive strategies, argues boutique fund manager Harvest Lane.
Speaking to InvestorDaily, Harvest Lane managing director Luke Cummings said current fee models for actively managed funds don’t do a good job of aligning the interests of managers with their underlying investors.
Mr Cummings said it was for this reason Harvest Lane had made the decision to shift to a paid-on-performance model, noting that “a client or investor is okay with paying if they get performance; it’s the lack of performance they object to”.
“A lot of investors are moving from active management to passive management, mostly to save on fees, they think, ‘I’m not getting very good returns with my active manager – I’ll get nothing better from investing in passive, but I’m paying less’,” he said.
Under traditional fee structures, fund managers have “a real incentive” to keep growing assets under management “arguably indefinitely” and even to the expense of investor returns, Mr Cummings said.
“We feel very strongly that the interests of the manager should be aligned with the investor, so that’s what we’ve chosen to do,” he said.
“By saying we’re happy to be paid solely by performance, we feel we’re sending a clear message about how much we believe in what we’re doing.”
Mr Cummings said that investors were “already voting with their feet” by moving their capital into passive strategies, and active managers will need to adapt in order to compete.
“If the industry doesn’t change either by offering better performance and/or better structure that are aligned with the underlying investors, I think active management is going to continue to see a movement of funds out of active management towards passive,” he said.
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