Managers failing to justify fees – research

A report by Insch Capital Management takes a close look at asset management fees and performance, and concludes that by comparison hedge fund fees are ‘altruistic’.

The fund management sector has been under pressure for some time over its fees, which have appeared increasingly decorrelated from the sector’s ability to deliver returns to investors. A growing number of investors have taken the view that parts of the fund management sector are beta trackers charging alpha fees.

The recent trend in portfolio ­construction has been to mix proven high performers with exchange traded funds. Now a new report analysing the fees and performance of the traditional funds industry looks set to give this trend a further boost.

Alternative investment group Insch Capital Management, based in Zug, Switzerland, has launched a scathing attack on fees the industry charges, based on a study comparing the fees and performance of 247 funds of 14 major asset managers in the UK, Switzerland and Luxembourg. Insch Capital says the research shows that many fund managers are “making more in management fees than their investors are receiving in returns”.

The conclusion is based on ­analysis that uses a proprietary Risk to ­Revenue (R2R) model, a risk ­management tool that gives 
a view of investors’ return on invested capital in relation to the asset manager’s return from fees. The model also ­provides interactive risk scenarios for both investor returns and fund ­manager returns.

R2R uses two performance ­measures: the Insch Index, which compounds 1% p.a. (or another return, specified by the user) for the period in study, as an absolute acceptable return benchmark; and the Insch Ratio, which compares investors’ average rolling one-year holding period with the management fee charged by managers.

Insch says its analysis provides a view of investors’ return on invested capital in relation to the asset manager’s return from fees. Of the 247 traditional funds, 81 are fixed income funds (59 non-UK, 22 UK) and 166 are equity funds (89 non-UK, 77 UK).

The assets under management in these funds are more than $121.1bn. Annual management fees for the sample exceed $1.5bn, giving an asset-weighted average of 1.26%.

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