With all that money going into passive funds, how do you prop up your active managers?
At Allianz Global Investors, they’re trying sneakers.
Senior executives at the asset management unit of German insurer Allianz SE are touring the firm’s 14 offices globally, handing out white running shoes. The campaign is part of a marketing and branding effort by the EUR 513 billion ($595 billion) firm to emphasise its role as active asset manager, at a time when few investors believe they’re worth the extra fees over low-cost index funds.
AGI is so confident that it can offer additional value that the firm recently slashed the management fee on some funds in return for a performance fee that will only kick in if the fund beats its benchmark.
"Sneakers are just part of this brand relaunch,” said Andreas Utermann, AGI’s chief executive officer. "It’s not just the investment process that’s active, it’s the whole ethos of the firm and the way that we give advice—hopefully a bit more counter-cyclically than in the past.”
Active managers in general have lost market share to passive index trackers, particularly in equities, because they haven’t been able to show they can beat the market after considering the impact of fees. At AGI, 70 per cent of third-party assets—money overseen for clients other than Allianz—performed better than their benchmark in the three years through March. That number drops to 37 per cent when taking into account the fees clients have to pay.
Looking at the number of funds, rather than assets, 40 per cent beat their benchmark after fees, according to figures compiled by Morningstar Inc.
Adding performance fees while cutting the management fee—which investors pay no matter how well or poorly a fund performs—links the fees a fund company earns more closely to how well it does for its clients. Traditionally, hedge funds have charged performance fees, though most also charge a fairly high management fee of around two per cent.
Charging mainly for value added on top of the market is a way to lure back clients who might be tempted to invest in cheaper ETFs, Utermann says. The firm’s vehicles offer a low fixed fee of 20 basis points and an additional 20 per cent performance fee if a fund outperforms its benchmark.
"We still need to overcome a natural reluctance that people have" against performance fees, said Utermann. "You get it pretty much for the price of an ETF and you only pay if we perform. Why wouldn’t that be a good deal?"
Utermann joined AGI in 2002 from Merrill Lynch Investment Managers, first overseeing equities before becoming global chief investment officer in 2012. Since then, clients have added almost EUR 40 billion in net new money, according to AGI. He was named CEO in 2016, though he retained the title of CIO.
AGI is the smaller of two asset management businesses owned by Allianz, Pacific Investment Management Co., or Pimco, being the other.
Making fees more dependent on performance adds volatility to a firm’s revenue, though so far, the amount of assets in such funds is very small. The firm started offering the new fee structure in the US last year, and this year introduced it for five UK funds. Together, the long-only strategies where clients can choose that option have a little more than $600 million in assets, though that amount includes share classes with other fee structures as well.
Utermann says that performance fees also force fund companies to focus on how well they do their job and dissuade them from chasing mergers for the sake of scale alone, because scale tends to be the enemy of performance. Peter Kraus, the former CEO of AllianceBernstein Holding LP, has said that the fund industry may have to shrink by a third to restore performance.
AGI made a couple of smaller acquisitions in the past years, adding about EUR 34 billion in assets with the purchase of UK fixed income specialist Rogge Global Partners in 2016, and purchasing US private credit manager Sound Harbour Partners the same year.
Utermann said he’s interested in making deals in alternative assets, emerging markets or building AGI’s distribution network. New European rules known as MiFID II have prompted a growing number of fund managers to plan to sell more products directly to retail clients. The rules also force money managers to pay separately for any research they get from banks, which will probably result in less coverage. That, in turn, may help active managers gain an edge, Utermann said.
"It probably leads to more alpha being available,” he said. "Fewer coverage on the major stocks and small cap upwards towards the mid-caps means probably a less efficient market."