The two largest asset consultants in Australia have sounded the death knell for traditional funds manager fee structures with an historic joint statement of “principles” for fee negotiations with super funds.
Frontier Investment Consulting and JANA Investment Advisers have produced a guideline note including a set of six principles for super funds in their fee negotiations with managers. The principles emphasise the rewards managers should get for alpha, skill and uncorrelated performance attributes and downplay the remuneration traditionally afforded them due to asset growth and market rises.
JANA, owned by National Australia Bank, and Frontier, owned by a group of industry funds, are the largest advisers to super funds by assets, accounting for more than $250 billion.
Fiona Trafford-Walker, chief executive of Frontier, said she had been working with JANA’s Ken Marshman, head of investment strategy, on the principles for most of this year. She had not approached the other leading asset consultants, such as Towers Watson, Mercer or Russell Investments to join in the principles.
“Our two firms have known each other for a long time. I’ve known Ken for 10-15 years and we thought that by working together we could get agreement,” she said. “We have both worked together on AustralianSuper for about three years.”
Trafford-Walker has been running with the issue of flat fees, plus performance payments, for managers for about 18 months. The principles include the notion of recovery of “costs” first by managers when negotiating appropriate performance payments. Trafford-Walker said that it was up to the managers to calculate and present these.
The principles also include an expectation that the average payment for alpha should be about 25 per cent, up to a maximum of 33 per cent. This represents the first time that the consultants have gone public on their view of the worth of alpha from a manager’s perspective.
Trafford-Walker said that the issue went beyond her firm and was something for the whole industry to discuss. It was also not just a case of lower fees, but, rather, about getting the structure right and ensuring the funds managers have sufficient certainty for their own future as well.
Marshman said the principles provided a sensible and fair framework for fee discussions which took into account both the needs of the funds manager as well as the investor.
“I have no doubt these principles will spark some different views and we are open to further input from all sides of the industry. The fee debate is an important one and it’s critical that the industry actively participates in the debate to ensure it’s well informed,” he said.