Alternative investment group Insch Capital Management has launched its proprietary Risk to Revenue (R2R) model, which provides an in-depth analysis of the traditional asset management industry, where many firms are making more in management fees than their investors are receiving in returns.
The Insch R2R analysis, which currently covers 14 major asset management firms based in Switzerland, Liechtenstein and the United Kingdom, provides a view of investors’ return on invested capital in relation to the asset manager’s return from fees. Some 247 traditional funds are included in the analysis, of which 81 are fixed income funds (59 non-UK, 22 UK), and 166 are equity funds (89 Non-UK, 77 UK). The assets under management in these funds are over USD121.1 billion. Annual management fees for the sample exceed USD1.5 billion, giving an asset-weighted average of 1.26%.
The R2R model is aimed at institutional investors as an aid in performance analysis, a due diligence component, a peer comparison and stress-testing tool. R2R also enables investors to estimate the risk of revenue loss in a continuum of market risk scenarios.
In terms of UK managers, specifically the six largest listed managers on the LSE, the R2R analysis focuses on their Unit Trusts and OEIC funds. The qualifying funds cover all the IMA sectors for fixed income and stocks and have an AUM of USD66.0 billion. The average traditional fund in the sample is more than 2.6 times larger than the average hedge fund (estimated at around USD250 million). Over the last five years, the equally weighted total return has been 11.1%. Investors who paid the average “sales charge” of 4.79% would have received a total return of 5.8% for the whole five year period. The average management fee collected by the UK asset managers on the OEICS was 1.44% p.a.. This implies 16.9% revenue in fixed fees, collected over the whole period.
The profit sharing is even worse in the Swiss banks’ traditional asset management universe, where total returns are negative even without accounting for a front-end load. Equally weighted total returns, before FEL, amount to -3.9% over the last 5 years.
To address the two key issues in the measurement and reporting of asset management returns – irrelevant benchmark selection and arbitrary choice of time period (both of which tend to favour the manager) – the Insch R2R analysis introduces two performance measures. The Insch Index compounds an investor defined % p.a. as an absolute acceptable return benchmark, and the Insch Ratio compares investors’ average rolling 1 year holding period return with the management fee charged by managers. These performance measures reveal that only 19% of the UK managers’ funds beat a 5% fixed annual benchmark. This proportion falls to 3% in the case of the Swiss managers. The Insch ratio is above unit in 40% of the cases for UK managers, but only in 33% of the cases for the Swiss managers.
Christopher Cruden (pictured), CEO of Insch says: “The results of the R2R analysis speak for themselves. It is surely unacceptable that investors are force-fed such underperformance. The choices are stark and clear: These managers must either produce better returns for investors or reduce their grossly inflated fees.”
Institutional investors are invited to view the Insch “Risk to Revenue” analysis online, where they can customise market scenarios, time range and the selection of funds for each Asset Manager. Purnur Schneider, Head of Research at Insch added, “We will be adding other traditional management groups to the database in time. Meanwhile, we would be very happy to provide investors with our analysis of other traditional management groups if requested.”
Cruden says: “One interpretation of the R2R analysis might be that traditional asset managers are better at marketing themselves than they are at managing investor’s money. In any case, on the basis of research, criticism of the Hedge Fund industry is totally unfounded. Compared to traditional asset managers, the fixed fees levied by Hedge Funds are positively altruistic”.