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Allianz Global Investors Redefines Rules Of Active Management With Launch of PerformanceFee Funds
FYI: Allianz Global Investors (AllianzGI), one of the world’s leading active investment managers, announced today the launch of the AllianzGI PerformanceFee Fund suite of products offering a performance fee structure in which the management fee goes to zero if the funds don’t beat their benchmarks over a rolling 12 month performance period. Regards, Ted https://www.businesswire.com/news/home/20171219005678/en
Whenever you read expressions like "innovative" and "sets itself apart" (here, "in that the minimum management fee goes to zero if the funds don’t outperform their benchmark"), you should be wary of hype.
Here's what M* had to say: "It's a rare [but not unique] situation in the industry. The performance fees of most other funds that levy them are structured in a way that makes a negative or zero net expense ratio mathematically impossible."
It wasn't writing about these funds. That's a quote from 2011, where M* was describing Bridgeway Funds. The title of that article was "Bridgeway Pays Shareholders to Invest, for Now". Bridgeway reduced management fees so low (well below zero, unlike Allianz) that the total ER of two funds were 0.00% or less.
Basing a performance fee on a twelve month performance is akin to companies jiggering quarterly performance to keep the market happy. A year is too short a period of time to allow a manager's strategy to play out. Instead, it encourages window dressing and conservative investing if the fund is slightly ahead, and excessive risk taking if the fund is way behind.
As noted in this CBS Moneywatch article also about Bridgeway in 2011: "[Bridgeway's] aggressive performance fee ... is calculated on the fund's average assets over the trailing five years, instead of the more common three years".
Funds don't generally use one year performance figures. For example, Fidelity uses a rolling 36 month period to benchmark performance.
Basing a performance fee on a twelve month performance is akin to companies jiggering quarterly performance to keep the market happy. A year is too short a period of time to allow a manager's strategy to play out. Instead, it encourages window dressing and conservative investing if the fund is slightly ahead, and excessive risk taking if the fund is way behind.
I couldn't agree more, although a question arises as to what the fee should then be when the fund first launches until it reaches, say, a five year record. I also think that funds that are lagging badly for a year or two may tend to close more quickly with such a fee schedule before their strategies have a chance to play out.
Comments
Here's what M* had to say: "It's a rare [but not unique] situation in the industry. The performance fees of most other funds that levy them are structured in a way that makes a negative or zero net expense ratio mathematically impossible."
It wasn't writing about these funds. That's a quote from 2011, where M* was describing Bridgeway Funds. The title of that article was "Bridgeway Pays Shareholders to Invest, for Now". Bridgeway reduced management fees so low (well below zero, unlike Allianz) that the total ER of two funds were 0.00% or less.
Basing a performance fee on a twelve month performance is akin to companies jiggering quarterly performance to keep the market happy. A year is too short a period of time to allow a manager's strategy to play out. Instead, it encourages window dressing and conservative investing if the fund is slightly ahead, and excessive risk taking if the fund is way behind.
As noted in this CBS Moneywatch article also about Bridgeway in 2011:
"[Bridgeway's] aggressive performance fee ... is calculated on the fund's average assets over the trailing five years, instead of the more common three years".
Funds don't generally use one year performance figures. For example, Fidelity uses a rolling 36 month period to benchmark performance.
See also Barron's Should Fund Managers Get Paid for Performance