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Performance Fee Push Grows with New Risk-Linked Model
April 2019

By Mariana Lemann

Dallas-based Westwood Group is joining the growing list of managers offering new fee models designed to appeal to investors who don’t want to pay active management fees for passive-like performance. Some critics say performance fees encourage portfolio managers to take excessive risk to hit their targets, but Westwood has tried to assuage these concerns by embedding guardrails in its products to keep the risk levels down.

“Performance fees have been calculated on excess return,” says Philip De Santis, head of product development. “The market goes up more years than not. So, you can put more risk into a portfolio which isn’t true management skills, just beta – then you can get compensated at a very high level, much higher than you would have had on a fixed-fee basis just for taking excess risk in the portfolio.”

While performance fee models raise the bar for asset managers, they have the potential to discourage portfolio managers.

“There is some cyclicality to managers’ excess returns… and sometimes that can be prolonged,” says Stuart Blair, director of research at Canterbury Consulting. “If a manager has been paying their employees based on that and all of a sudden they go through a streak where they materially underperform…that can present a challenge to retaining top talent.”

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