Lewis highlights the fact that this fee model is not being applied to brand new funds. Rather, they’re applying it as a series to existing strategies with established track records. That established nature, he notes, gave him further confidence in the ability to outperform.
While most of the strategies included in this series hold equities and would therefore be more expected to play the alpha generation role, the new series includes one fixed income fund. Lewis accepts that fixed income would traditionally play more of a defensive role and that alpha generation is often not what investors want or even expect from their fixed income. He notes, though, that this fund is a high yield credit strategy, which tends to have more equity-like performance and greater potential of achieving that performance goal.
From an end-user standpoint, Laurel Marie Hickey notes that fees are more often an issue for advisors and clients in down years. The Senior Wealth Advisor & Senior Portfolio Manager at Wellington-Altus Private Wealth notes that when markets underperform and portfolios pull back, paying a management fee feels much more onerous than when returns are strong. Anything that helps offset a downturn, she adds, can be an area where clients see real value.
“Portfolio managers ca really shine in a down year,” Hickey says. “One of the biggest things we get from clients on a down day is when they tell us they weren’t as down as they expected to be and thank us for getting them there.”
Hickey operates a quantitative model of 22-33 names, and so typically only uses an externally managed fund in a buffer position. She notes that there could be some appeal in using a possible performance fee model on fixed income assets, simply because the returns on fixed income funds tend to be that much lower. Speaking hypothetically about a performance fee model, Hickey says she might consider using them as a means of accessing momentum in the markets, with the fee waiver functioning to offset potential downside should it occur.
