Latest price-war salvo pegs fees to low-risk performance

Dallas-based asset manager road tests a fee model that might be too complex for some investors to grasp

Mar 28, 2019 @ 5:05 pm

By Jeff Benjamin

Westwood Holdings Group, a $16.6 billion Dallas-based asset manager, is hoping to catch a ride on the price-war bandwagon with a managed-account fee model that links fees to the risk taken by the portfolio manager.

To underscore the lack of value in simple market beta, the Westwood pricing model, which is being applied initially to a concentrated large-cap strategy, will only apply fees to risk-adjusted performance that exceeds the performance of the benchmark.

The ultimate fee, which is capped at 1.25%, will be applied to the 60% to 80% of the performance that the investor retains. Like some alternative investments, Westwood will benefit by keeping 20% to 40% of the portfolio gains.

"It starts with a flat, zero fee and you only pay when we outperform," said Phil DeSantis, Westwood senior vice president and head of product management.

The strategy is initially available only to institutional investors, clients working with financial advisers and accredited investors.

The fees are designed to be risk-based, which Mr. DeSantis argued will prevent a manager from pushing the limits of risk to generate a higher fee.

"It measures the level of outperformance and the risk being taken to generate that outperformance," he said. "It prevents managers from gaming fees by taking risks."

While there have been efforts across the mutual fund industry to charge variable fulcrum fees that adjust as performance climbs, Mr. DeSantis said it has never been done by factoring in the amount of risk taken to generate the performance.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said one challenge the Westwood model might encounter if it reaches the mutual fund level is getting investors to understand and embrace the complexity.

"It's not a gimmick, but it is a way to get investors to pay attention to your fund," he said. "Investors search for funds based on expense ratios and performance, and even though there is a pull toward less expensive products, I think fluctuating fees are harder to explain."

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