“We get fired if we underperform the active industry,” Utermann said in the interview. With smart beta, “it’s difficult to see how you can be fired because what are you going to compare it to? So it’s kind of a clever marketing ploy.”
Utermann joined AGI in 2002 from Merrill Lynch Investment Managers, first overseeing equities before becoming global chief investment officer in 2012. Since then, clients have added almost 40 billion euros in net new money, according to AGI. He was named CEO in 2016, though he retained the title of CIO.
AGI is the smaller of two asset management businesses owned by Allianz, Pacific Investment Management Co., or Pimco, being the other.
Making fees more dependent on performance adds volatility to a firm’s revenue, though so far, the amount of assets in such funds is very small. The firm started offering the new fee structure in the U.S. last year, and this year introduced it for five U.K. funds. Together, the long-only strategies where clients can choose that option have a little more than $600 million in assets, though that amount includes share classes with other fee structures as well.
‘More Alpha’
Utermann says that performance fees also force fund companies to focus on how well they do their job, and dissuade them from chasing mergers for the sake of scale alone, because scale tends to be the enemy of performance. Peter Kraus, the former CEO of AllianceBernstein Holding LP, has said that the fund industry may have to shrink by a third to restore performance.
AGI made a couple of smaller acquisitions in the past years, adding about 34 billion euros in assets with the purchase of U.K. fixed income specialist Rogge Global Partners in 2016, and purchasing U.S. private credit manager Sound Harbour Partners the same year.
Utermann said he’s interested in making deals in alternative assets, emerging markets or building AGI’s distribution network. New European rules known as MiFID II have prompted a growing number of fund managers to plan selling more products directly to retail clients. The rules also force money managers to pay separately for any research they get from banks, which will probably result in less coverage. That, in turn, may help active managers gain an edge, Utermann said.
“It probably leads to more alpha being available,” he said. “Fewer coverage on the major stocks and small cap upwards toward the mid-caps means probably a less efficient market.”
Brexit is another regulatory quandary fund managers have to grapple with. AGI has 300 people in London and is taking advice on setting up a legal entity in the U.K. and capitalizing it. The cost can reach millions of euros, Utermann says.
“It ratchets up,” said Utermann. “The closer we come to year end, the more and more costs we’ll have incurred and the less likely we’re going to be able to reverse course.”