Close Close

Portfolio > Mutual Funds

New Active Funds: The Better They Do, the More You Pay

Your article was successfully shared with the contacts you provided.

Almost every market outlook for 2018 has strategists favoring active management over passive in preparation for the downturn that is sure to come, if not next year, then in the next few years. Actively managed funds, the thinking goes, have a greater opportunity to outperform because passive index funds will decline in almost lockstep with the falling market.

A survey by AllianceBernstein of roughly 200 financial advisors attending Schwab’s annual Impact conference in November found that close to four out of five believe the market is due for a correction and 62% expect actively managed assets to outperform in that case. But whether they will choose actively managed funds is an open question because actively managed funds tend to charge higher fees than passive investments, and 63% of advisors surveyed say fees are a very important factor when choosing investments.

(Related: Can This Fee Structure Save Actively Managed Funds?)

With those factors in mind, AllianceBernstein expects to launch in Q1 2018 a series of six actively managed advisor-sold mutual funds that will charge a base fee plus a performance-linked fee if the fund outperforms its benchmark index by a certain amount.

The AB Performance Fee See Series consists of five stock funds and one bond fund:

  • Large Cap Growth Portfolio
  • US Thematic Portfolio
  • Core Opportunities Portfolio
  • International Strategic Core Portfolio
  • Emerging Markets Growth Portfolio
  • International Bond Portfolio

(Related: Actively Managed Funds Stage a Short-Term Comeback)

The formula for the all the stock funds except emerging markets, for example, is a 0.55% base fee of average daily net assets plus or minus a performance adjustment up to an annualized rate of 0.50%. The result is a total fee ranging between 0.05% and 1.05%. The funds must outperform their respective benchmarks by 1.40% on an annualized basis to qualify for the additional performance fee, which translates into an additional seven basis points for every 20 basis points of outperformance.

More on this topic

“If we do our job and outperform we get a higher management fee,” says Chris Thompson, head of the client group Americas for AllianceBernstein, which caters to retail and institutional clients.

And if these performance fee funds succeed and attract advisor interest AllianceBernstein could launch many more, says Thompson.

“We’re seeking a way to meet client demand and take away the fee issue to build portfolios our clients want, including active management.”

Close to half of actively managed mutual funds are beating their benchmarks this year, according to Bank of America Merrill Lynch, which is unusual. That’s roughly three times the rate of the past three, five, 10 and 15 years, according to data from S&P Dow Jones Indices.

— Related on ThinkAdvisor: