Asset owners and managers may not always agree on fees, but one thing both parties are thinking a lot more about these days is creating innovative structures which – if done right – could provide rewards for the former and value for the latter.  

Albourne Partners head of fintech and implementation Gaurav Amin said fees shape what a manager or an investor does from both an economic and behavioral standpoint. Albourne is a non-discretionary alternatives investment consultant. 

Amin told the Fiduciary Investors Symposium at Oxford that one economic impact of fees is on investment strategy.  

“One of the big things which is going on right now is multi strategy managers who are using pass-through fee structures, effectively charging 7, 8, 9, or 10 per cent management fees,” Amin said.  

“For them to earn that level of fee, or to justify that level of fee, what we have calculated is they need to be a third more levered than any other multi-strategy manager delivering the same level of return. 

“Your investment strategy is being directly driven by the fee structure that you have.” 

Behaviorally, fees influence how much risk managers take, and also impact the team-building and the culture of a manager organisation, which asset owners should consider when they are looking for long-term investment partners. 

Amin said one of the common reasons why managers ask for high fees is to attract talent, but asset owners need to consider how the fee is distributed within the organisation.  

“[Managers say] ‘talent is very expensive nowadays, and that’s why we want to create the higher fees.’ However, a team is more important than the collection of stars,” he said.  

“How the bonuses are given out is quite important and drives the culture of the company. So, if you’re looking for a sustainable investment…that you are willing to live with for a long period of time, then having the right fee structure within the company itself can be quite important.” 

Amin urged asset owners to consider the “three gripes” of fees when negotiating the next mandate with managers. The first one is the level of fees.  

The problem with traditional fee models such as a 2-and-20 structure is that there is an imbalanced investor profit share. Albourne’s analysis shows there is likely to be an equilibrium of fees when investors’ share of profit reaches 60 to 70 per cent – below that range, investors may deem investment in a fund unworthy; higher than that range, managers may not be sufficiently incentivised. The level of fees is hence critical, because there is always the likelihood that investors will lose patience before it reaches equilibrium, Amin said.

The second gripe is the shape of the fee structure, where there are more nuanced opportunities for asset owners and managers to align their goals, Amin said.  

For example, if asset owners are investing in a fund to provide a hedge, then there should be higher management fees and lower performance fees. If it’s a pure alpha fund, then asset owners should seek a higher performance fee and lower management fees.  

The shape of the fee structure is also where investors can get creative with incentives for different types of managers. With hedge funds, there are levers such as high watermarks, crystallisation periods, and hurdles; for private market funds there are things such as carried interest, catch ups, and monitoring fees.  

Amin reminded managers that “one fee structure is not going to solve all your problems”. 

“Each investment – each investor – in the same fund could have a different objective, and therefore they have a different fee structure. So, it is up to the manager to offer those,” he said. 

“That will help align the interest of that particular investor.” 

With that said, however, no fee solution should come at the expense of the last gripe of fees, which is transparency. It is notable that different variables and structures often make fees difficult to measure and benchmark. 

Amin said there might be a bigger role for consolidated metrics such as investor profit share (IPS) to play in fee measurement. He defined IPS as share of gross returns that the investor earns or is expected to earn for a given fee structure. 

“This is where transparency comes in: how is the manager managing the money? And how much transparency are they giving you? Are they making those decisions for the fee structure or for the performance?” he said.  

“That’s the collaboration that you need to have with your manager, to have that constant dialog saying, ‘you are doing these things for the right reason or the wrong reason’.” 

Ian Goldin, professor of globalisation and development, senior fellow at the Oxford Martin School and professorial fellow at the Balliol College, University of Oxford, sketched an emerging world characterised by a rising Asia and a declining West.

At the Fiduciary Investors Symposium in Oxford, he said the aging population in Western economies will spend more on services, productivity growth will slow, and investment as a share of GDP will fall. These economies are still struggling with the legacy of the GFC and the pandemic, and high levels of debt mean they are fiscally constrained. Worryingly, investment is slowing down just as economies need it most.

In contrast, Asia and the Gulf have high rates of growth and investment, creating a virtuous circle that makes politics easier. In this environment, it’s possible for governments to “give without taking”, making it easier to be a politician. In contrast, when growth is low it is only possible for politicians to give by taking. It’s why politics in the US and Europe has become more fraught.

These governments are under pressure to renew key assets like their energy, transport, defence and medical systems. Meanwhile, education systems need to adapt to teach new skills.

“The rates of investment are too low,” Goldin said in an opening keynote for the symposium.

He flagged a shortfall of investment across the public and private sectors as well as a shortage in the “software” of ideas, business processes and skills. He said that regulatory systems are also out of date.

“The world is accelerating and our understanding is lagging further behind. We are not investing enough in keeping up to speed.”

In Europe’s fractious political environment, decision-making has become increasingly complex. Not only do governments not invest because they “don’t have any money”, but they also profoundly disagree because they are focused on short-term re-election. He warned of the inflationary impact and harm to the US economy if Trump delivers on his promise to export undocumented workers and hike tariffs.

Turning to global demographics, Goldin warned that today’s plunging birth rates mean fewer people will come into the workforce in 18-year’s time. The collapse in fertility has impacted “half the countries in the world” including countries like India where the birth rate has fallen below the replacement age.

He linked falling birth rates to women’s right to choose, contraception, and the cost of living, leaving more people deciding not to have children. This is despite many governments around the world trying to encourage women to have more children, like France, which has spent €1 million per additional child on its policy. Goldin said no policies are particularly successful, and all are very costly.

As birth rates fall, people are living longer as medicine advances. New drugs like weight loss drugs, as well as cures for cancers will mean that we no longer worry about the same illnesses. However, people will continue to succumb to neuro-divergent illnesses, and Goldin said the rollout of medicines that cure mental health is slower. This means societies will increasingly be made up of highly dependent, mentally fragile but physically capable people sustained by a smaller workforce.

When modern pension systems were built, they were designed for an average life expectancy after retirement of seven years. Now the average life expectancy after retirement is 25 years. Meanwhile, real risk-adjusted returns for pension funds are much lower. Moreover, rapidly aging populations become more politically powerful accounting for a larger share of the vote in democracies. These people typically don’t want to do anything that interferes with their lives like building houses in their neighbourhood – or agreeing to an increase in the age they receive their pension.

It led Goldin to reflect on the growing division in wealth between the young and elderly, most obvious in disparities in home ownership. He added that older people spend on different products (medicines and hospitality, for example) compared to young people.

Technology will transform biomedicine and pharmaceuticals. It is also set to transform the energy system, mobility and manufacturing. It will get rid of many of the repetitive jobs that have always been the middle-run on a country’s growth trajectory.

“Where are the jobs going to come from when the machines do the repetitive jobs?” Goldin asked.

Because China’s workforce has already rapidly contracted, the economy has integrated technology and AI faster than others. Wages are growing and coupled with a 5 per cent growth rate, China is far from in crisis. Moreover, he predicted China’s debt and structural issues will improve.

Goldin said that the jobs of the future will be in cities. Although the knowledge economy is footloose and people can work anywhere, he predicted they will gravitate to diverse cities. Cities offer young people an ecosystem, and he expects to see dynamic cities pull away in terms of income and productivity growth.

In another trend he also flagged that people are increasingly less mobile – the cost of housing and transport means people will become less mobile. “There will be a disconnect between the people left behind and the people doing well – the people who see a future and those who don’t,” he warned.

Globalization has created an entangled system of goods, services and people flowing across national borders. The GFC was the first manifestation of how a highly connected system can lead to instability.

Goldin traced the rise of Trump in 2016 and Brexit, as well as support for populist and nationalist politicians to the dramatic loss of trust in government after the GFC. The pandemic was another manifestation of this “butterfly effect” where consequences ripple throughout the world. “Globalization spreads risks and opportunities,” he said

Goldin noted that the rise of populism is not apparent in Asia, where people still see the opportunity of globalization. “Globalization is alive and well and living in Asia. It’s just dead in the Atlantic,” he said.

He warned that “high walls” keep out skills and investment, and hinder coordination. Nationalism and protectionism make it harder for countries to manage risk and increase productivity.

He believes that the buoyant mood in Asia makes war in the region unlikely because it would be an act of self-harm. China has grown and benefited from globalization, but he noted that China is also fragile – incomes are still low and climate change requires huge investment.

In contrast, countries like the UAE are able to navigate climate change because they are wealthy. He described the UAE as the “new Switzerland” increasingly attracting people and investment in an unstable world. He pointed out how many Gulf states illustrate a business model where immigration works, showing how countries can be “a hive” for foreign workers.

Goldin’s positive future for China contrasted with his outlook for Russia. He said Russia’s dependency on fossil fuels at a time the world is moving to net zero, plus its aging population, will lead to long-term decline. He suggested a future where Russia joins the EU and becomes a breadbasket once Siberia thaws.