There are, in theory and in practice, two camps with regard to fees: management fee only or management fee plus a performance fee. Is there another option?

Traditional asset managers will tend to charge a management fee: a percentage, or basis point (percentages expressed differently) fee on the assets they manage for clients – their revenue then is a direct function of their assets under management (“AUM”) – and this model makes sense from a business stability perspective in that revenues are relatively predictable, and growing revenues is directly proportional to growing assets. In the long term, then, the asset managers’ financial interest is aligned to performing well for their clients in order retain them and attract new clients. But financial success is also related to marketing budget, brand awareness and constantly building a larger asset base. Management fee is earned regardless of performance and only a decline in AUM (as a result of long term underperformance) will impact revenues.

The management fee plus performance fee model – which was introduced by hedge fund managers in the early days – was designed to directly align the manager’s financial interest with performance of their clients’ portfolios. Well-constructed performance fee structures allow for a hurdle (the minimum performance which needs to be achieved for the client before performance fees apply) as well as a high water mark (the previous “high” becomes the high water mark, ensuring that only new performance above that level qualifies for performance fee).

Performance fees have come under scrutiny and attack for many reasons: there is little uniformity in the structures applied, calculations are complicated and opaque, and media has tended to focus on the total cost to the client (while the hedge fund managers get rich!). While performance fee models tend to be hybrid (they do include some level of management fee which is AUM based and unrelated to performance), the lions’ share of revenues for the asset manager who does charge a performance fee, and does outperform, comes from that outperformance. The focus for these managers then is more on achieving exceptional performance than on having large-scale AUM.  It is easier to perform well on a relatively smaller fund size in many ways: smaller funds have the ability to be more nimble in the market and can concentrate exposure in high conviction opportunities in a wider investment universe.  Smaller portfolios can be more actively managed.

The ability to generate positive outperformance of an index or benchmark (also referred to as alpha) from active management is often questioned by academics and investors alike – and the statistics are not favourable on the whole. The focus on minimising fees (total investment charge, total expense ratios etc.)  has resulted in an almost wholesale shift in recent years towards passive or index funds – and competition on fees means that asset managers are pressured to achieve even larger AUM levels to maintain a steady bottom line.

At SAIY Asset Management we believe it’s time to re-think active management. We don’t believe investors should pay a management fee (however small) for an index return when they could ‘buy’ the index via an online broking account. We believe in actively managing our client’s assets for long term growth. Our investment approach combines leading-edge technology, advanced thinking, and artificial intelligence to leverage simple investment ideas. Simplicity which is repeatable is consistent.

We don’t look at relative benchmarks and we don’t charge any management fees. We are not motivated to grow our AUM – our focus is on achieving an absolute return for our select client base. We aim to do things differently, look at investments differently, and generate positive and transparent returns. We fulfil our commitment to growing our clients’ wealth before we earn anything.

Our fee model falls outside of the two camps: we are not trying to position ourselves among what has been done before- we want to change the face of investments to align with a new modern way of working. We embrace technology and change but remain steadfast in our one ambition to generate wealth for our discretionary clients. That will be our measure of success and the alignment of our stars.