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Can sneakers save active management?

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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 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 $595 billion firm to emphasize its role as active asset manager, at a time when few investors believe stock pickers are 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 taking into account the impact of fees. At AGI, 70% 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% when taking into account the fees clients have to pay.

Looking at the number of funds, rather than assets, 40% beat their benchmark after fees, according to figures compiled by Morningstar.

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 2%.

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% 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?”

AGI’s attempts to ramp up sales of its active products comes after Utermann previously described smart-beta strategies — quantitative models that attempt to deliver market-beating returns for the sort of fees usually charged for passive funds — as neither smart nor beta.

These eye-popping returns didn’t come cheap. Expense ratios averaged more than 1% and went as high as 158 basis points.
November 29

“We get fired if we underperform the active industry,” Utermann said in the interview. With smart beta, “it’s difficult to see how you can be fired because what are you going to compare it to? So it’s kind of a clever marketing ploy.”

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 $46.8 million 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, 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 U.S. last year, and this year introduced it for five U.K. 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, 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 $39.8 billion in assets with the purchase of U.K. fixed income specialist Rogge Global Partners in 2016, and purchasing U.S. 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 selling 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 toward the mid-caps means probably a less efficient market.”

Brexit is another regulatory quandary fund managers have to grapple with. AGI has 300 people in London and is taking advice on setting up a legal entity in the U.K. and capitalizing it. The cost can reach millions of euros, Utermann says.

“It ratchets up,” said Utermann. “The closer we come to year end, the more and more costs we’ll have incurred and the less likely we’re going to be able to reverse course.”

Bloomberg News