Japan’s $1.48 trillion Government Pension Investment Fund (GPIF) has created a new performance-based fee structure that it says “drastically” reduces the basic fee rate for its asset managers.
The fund said that under the old fixed-fee structure and partial performance-based fee structure, asset managers were “paid considerable sums regardless of their investment performance, and therefore have little incentive to set target excess return rates appropriately.”
While approximately 20% of the fund’s assets are actively managed by the asset managers, only a small number of funds achieved the target excess return rate from 2014 to 2016, according to GPIF.
“For this reason, we revised the current fixed fee structure and partial performance-based fee structure,” said the fund.
In a move that the GPIF believes will align the interests of the fund and its asset managers, it lowered its base fee rate to the rate of a passive fund, and eliminated the maximum fee rate. However, a carryover mechanism has been included to even out the amounts of fees paid, and a portion of the fees will be held back to ensure that the amount of fees is linked with medium- to long-term investment performance.
And to enable asset managers to achieve target excess returns over the medium- to long-term, the fund said the introduction of the performance-based fee structure will normally involve the termination of multi-year contracts with asset managers.
The performance-based fees are based on “the precise measurement of the monetary contribution of investment performance,” said the fund. This, it said, is reached by multiplying the excess return rate on the portion in excess of the basic fee rate by the share of alpha and the average daily balance. Additionally, there is no cap on the fee rate; the share of alpha is computed based on the target excess return rate, and the fee rate paid when the target excess return rate under the current contract is reached.
The GPIF also said the full amount of the performance-based fees calculated each year will not be paid. Instead, 45% of the cumulative amount will be paid to the asset manager, with the remaining 55% to be deferred to the following year as a carryover.
“We hope that introducing this new performance-based fee structure will lead to further evolution of active management institutions,” said the fund.