As appealing as this may be, it is uncommon because these approaches introduce business risk for an investment firm. When fees are 0 per cent, a manager who delivers performance in line with the index won’t stay in business long. But that’s the point. What better way could there be to focus the organisation’s attention on delivering sustainable value for clients?
Such a manager would have very little reason to prioritise the gathering of assets and an extremely powerful incentive to focus on their highest-conviction investment ideas. Business risk would remain a challenge, but investment managers are meant to be expert at analysing business models and so should be able to manage this with prudent capital reserves and performance-based variable remuneration structures. After all, investment management firms have minimal capital expenditure requirements to budget for.
Of course, no fee structure – no matter how well designed – can make one a better investor. Active management is a zero-sum game and in order to add real value over the long term, managers must be able to exploit market inefficiencies and capitalise on the mistakes of others. Unless your active manager can make a convincing argument that they have the philosophy, process and people in place to do this over the full investment cycle, you really are likely to be much better off changing to a different manager, or even to an index fund.
Dan Brocklebank is a director of Orbis Access and chairman of Orbis’ UK executive committee
