Viability of performance fees under new scrutiny

Last week Gam, which is listed in Switzerland but has a global presence, shocked markets by issuing a profit warning before its half-year results.

The expected 50 per cent fall in profits, which the asset manager said it would attempt to offset, was attributed mainly to a decline in revenue from performance fees.

A broader decline in the use of such charges, placed on offerings including long/short products in the retail space, could now take place. This is due to an increased focus on cost and shareholder pressure to maintain revenues.

Morningstar Investment Management group Emea chief investment officer Dan Kemp said: “The decline in performance fees is cyclical but there are broader trends.

“There is the move to lower fees. There is a situation where fund buyers’ appetite for performance fees [has] lessened, coupled with concerns about the impact of fees on the profitability of asset managers.

“It wouldn’t surprise me if we saw a gradual move away from [performance] fees.”

Analysts have also sounded alarm bells over the exposure some asset managers have to the model.

In a recent note, RBC Capital Markets warned three listed asset managers – Gam, Man Group and Henderson – had “material” exposure to such fees, with the former two feeling the greatest pressure.

“2016 will not be a good year for performance fee generation, putting the alternative view to asset management (charging higher management fees in addition to collecting performance fees) under further scrutiny,” RBC said.

While RBC noted performance fees were “well diversified” in Henderson’s case, the profit warning from Gam could have “negative read-across implications to Henderson and Man Group”, it said. The three groups declined to comment.

Nigel Birch, deputy managing director at research firm Spence Johnson, said weak markets had created difficulties for funds looking to reach performance fee targets.

“It’s a natural consequence of markets lacking beta and poor performance across asset classes,” he explained.

“There are managers who have traditionally charged high performance fees. But when we are dealing with 3 or 4 per cent returns [from the market] at best a year, where’s the alpha you can add to that?

“The revenues get pushed down and the business has to catch up. It could be long term or temporary – it’s hard to say what it will be.”

Beyond this, there is a belief that fewer funds with performance fees could come to the retail market.

“What will happen is managers who charge performance fees in other parts of their portfolio are bringing them to the retail market without performance fees,” Mr Kemp said.

“They know they are not going to sell.”

Others have come to the defence of performance fees.

Gill Hutchison, head of investment research at City Financial, added that the loss of such models could be “a disincentive to the actual fund managers who may be remunerated on performance fees”.

But she claimed the direct impact on fund buyers could be limited because they “either do or don’t accept performance-based remuneration for the funds they select”.

Mr Kemp agreed and noted the demise of such a structure could prove to be “a double-edged sword”.

Abandoning performance fees could be coupled with a loss of incentives, he said.