David Solo, group chief executive officer of GAM, has insisted that his group will not cut its fees to attract greater flows.
In 2013 GAM’s assets under management (AUM) declined by 4% to £47 billion, due in part to outflows of £1.75 billion.
‘When somebody asks me why I wouldn’t accept a big new ticket at a 25% discount to normal fees in a period of slow net new money or maybe soft performance, the answer is that it is extremely hard to ever raise your prices,’ Solo said.
He noted too that GAM’s agreements with many of its large investors guaranteed them the lowest available rates, so any discounts would significantly detract from revenues.
‘Making a decision to discount fees in the short-term would certainly allow us to boost reported AUM and net new money, but it would not be a profit-maximising strategy for the company in the medium and long-term,’ explained Solo.
‘Unlike many firms in the industry, we do not focus on growing assets. We focus on growing profits and that’s a big difference. Therefore, we have to be willing to forgo new asset opportunities if they don’t meet our strict profitability objectives.’
Indeed, despite lower assets under management, GAM posted a 15% rise in net fee and commission income to £415 million in 2013.
‘Clearly, this is the result of the significantly improved average margin across the business, demonstrating concretely our pricing discipline and success in developing the higher margin products that increasingly discriminating clients really need,’ Solo commented.
During the year GAM’s margin on investment management climbed to 84.3 basis points from 75.8 basis points in 2012. Three quarters of the increase in the group’s revenues came from higher management fees, with the balance from performance fees.
Why give up capacity at a discount?
Solo argued that because many active strategies are not ‘infinitely scaleable’, it made no sense to lower fees on such funds.
‘If I decide to give away half a billion dollars of capacity at a 20% discount today, it really is the case that over the next three or four years I have half a billion dollars less to sell at full margins and that’s costly.’
Solo felt that this was a sustainable approach for GAM as the market splits between alpha and beta specialists.
‘Given the scarcity of firms that can provide truly high quality active funds, we see the typical fee levels remaining attractive in this segment. Buyers really are bifurcating their allocations between low-tracking-error index types of products - where it’s really all about reducing their costs and you have really no pricing margin – and their allocation to active and alternative products, where their clear focus is on gaining access to the highest quality funds from proven, reliable providers.’
He added: ‘I don’t want to suggest that cost is irrelevant, but it makes no sense to go for the third best fund that’s a little bit cheaper.’
As an example of where GAM has enjoyed success without slashing prices, Solo pointed to the GAM Star Technology fund. Managed by Citywire AAA-rated Mark Hawtin (pictured), the fund has grown to £408 million since launching in 2011. Its return since inception has been 64%, compared with 36.5% from the MSCI World Information Technology index.
Solo also dismissed the idea of launching many more funds as a way of boosting assets. ‘You can’t be a winner by launching a new China fund once it’s everybody’s favourite stock market,’ he commented.
‘You have to do it the way GAM did it, by launching the China fund years before it became mainstream and thus having the established team and track record in place when demand emerges.’
The £1.5 billion GAM Star China Equity fund, run by + rated Michael Lai, was launched in 2007. It tops its Citywire sector on a three-year view, having returned 10.6% while its average peer has lost 4.2% and the MSCI Zhong Hua index has dropped 0.4%.