This is a very interesting perspective and interview of a former active fund company CEO. Since most managers don’t outperform their benchmarks net of fees, one could describe three fund-client arrangements that benefit both client and manager:
1. Cap the amount of dollars a fund can attract and maintain the same fee. If a fund collects too many assets (client dollars) it can’t keep buying the 10 or 15 high-conviction stocks. Thus, it buys more stocks and starts to look like an index. Cap the asset size and you can maintain the high-conviction strategy.
2. Charge a performance-based fee. If a manager does not beat the benchmark, Yee manager is paid no more than a passive management fee. High performing managers survive, low performing managers go out of business.
3. Just buy index funds in the first place. Regardless of the fee structure, passive outperforms active net of fees the majority of the time anyway.
Food for thought…