Contract Committee
Exceptional Market and Asset Growth So Why Not Corresponding Industry Profit Margins? Print E-mail
Written by By Sara Yerkey of Management Practice Inc. (MPI)   
     2012 was a year of fantastic market performance, even amidst slow economic growth. The S&P returned 16% and the aggregate bond index over 4%. So as the year-end earnings reports were announced, why didn’t we hear margins jump or at least climb for asset managers?
Read more...
 
Did Market Volatility in 2011 Impact Firm Profitability? - April 2012 Print E-mail
Written by Sara Yerkey and C. Meyrick Payne of Management Practice Inc. (MPI)   

mfgovern_april_2012_img1.png    2011 was a year of hesitant investors, a shifting asset mix, and continued volatility, but when all combined, the result was no change in the average firm’s profitability between 2010 and 2011. Although the market recovery that began in 2009 and 2010 continued in 2011, there was slower economic growth than anticipated, partnered with intensifying European sovereign debt and market fluctuations. The greatest decline was recognized with market depreciation in the third quarter. However, these fluctuations were insignificant in comparison to the decline in 2008, and the asset levels returned quickly, allowing average assets to increase between 2010 and 2011.  Management Practice has analyzed the asset trends and resulting pre-tax margins of publically-traded firms. To highlight the quarterly fluctuations of the past four years, the average ending assets of the included firms is presented at right.

Read more...
 
The Challenges of Declining Fund Assets: Independent Directorsí Responsibility at Contract Renewal Print E-mail
Written by C. Meyrick Payne and Sara D. Yerkey, MPI - AS ORIGINALLY PUBLISHED IN FUND DIRECTIONS, MARCH 2012   
     Mutual funds with steadily increasing assets are generally positive indicators for fund directors and shareholders alike.   However, declining assets in a fund are also a possibility. The purpose of this article is to highlight some of a fund director’s responsibilities, particularly during the contract renewal process, when the asset base is shrinking.
The first order of business for the fund director is to assess the situation. The key analysis is to differentiate between market appreciation (or depreciation), investment performance, and fund inflows or outflows. This allows directors to determine if relatively poor investment performance, ineffective marketing, strategy popularity, or other drivers may be causing the decline. The second analysis is to understand if the declining asset base is confined to a few funds or if the impact is occurring throughout the fund family. Complex-wide shrinkage compounds the effect as there are fewer assets to spread the fixed expenses across and the marketing problems may be systemic.
Read more...
 
Advisory Fee Breakpoints: A New Look at the Data - February 2012 Print E-mail
Written by Sara Yerkey, Management Practice Inc and Max Rottersman, FundAnalyze.com   
     What percentage of open-end mutual fund assets have advisory-fee breakpoints? The answer might surprise. Almost 40% of all fund assets provide economies of scale to their shareholders by including board-approved breakpoints in their fee structures.
Read more...
 
Industry Profitability Returns as Average Assets Rise in 2010 Print E-mail
Written by Meyrick Payne and Sara Yerkey of Management Practice Inc. (MPI)   

     The most important function performed by mutual fund trustees is the annual review of investment management arrangements.  One of the factors in this review is the analysis of the investment manager’s profitability. The Jones vs. Harris case has reinforced the contract renewal process that has been conducted for the past 30 years, and has emphasized that the assessment of the advisor’s profitability remains a necessary step.

Read more...
 
Supreme Court Confirms Need for 2009 Profitability Benchmarks Print E-mail
Written by C. Meyrick Payne and Sara Yerkey of Management Practice Inc. (MPI)   

     The most important function performed by mutual fund trustees is the annual review of investment management arrangements.  One of the more complex and potentially confusing factors in this review is the analysis of the investment manager’s profitability. The recent ruling in the Jones vs. Harris case has reinforced the contract renewal process that has been conducted for the past 25 years, and has emphasized that the assessment of the advisor’s profitability remains a necessary step.

     The procedure trustees follow to review profitability is critical. A thorough review process and adequate documentation will help demonstrate that trustees have fulfilled their responsibilities as “watchdogs” of the interests of the shareholders.  The courts have clearly rejected the Calvinistic notion that too much profit is in itself a cause for condemnation. There is no hard and fast rule for determining whether an adviser earns an unreasonable profit from a fund. One court found that, after considering all relevant factors, a fund’s pre-tax profit of 77% return on revenue was reasonable under the circumstances.

Read more...
 
Three Eras of Selecting Peers for Contract Renewal - February 2010 Print E-mail
Written by Sara Yerkey and Meyrick Payne   

For many years the principle methodology for selecting peers to assess investment performance and fees and expenses has been based on either investment objective or investment style. This MPI Bulletin argues that a supplemental selection process should include investment strategy. The principle logic behind this concept is that to a greater and greater extent the differentiator between alternate funds is based on how investment selection decisions are made rather than the result of those decisions.

 

Read more...
 
Returning Assets and Profits in the First Half of 2009 Print E-mail
Written by C. Meyrick Payne and Sara Yerkey   

As markets rebounded in 2009 from the tumultuous decline in 2008, the 1st and 2nd quarter end assets under management of management companies generally also improved, and revenue went right along for the upswing.  Advisory and operating margins also improved but not to quite the same extent.

Read more...
 
Profitability Benchmarks for Contract Renewal - April 2009 Print E-mail
Written by By C. Meyrick Payne and Sara Yerkey of Management Practice Inc.(MPI)   


The most important function performed by mutual fund trustees is the annual review of investment management arrangements.  One of the most complex and potentially confusing factors in this review is the analysis of the investment manager’s profitability. In the past year the Jones vs. Harris case has perplexed many a mutual fund lawyer in that it may change the way in which the contract renewal process has been conducted for the past 25 years. However, there has been no final resolution and, until the case is decided by the US Supreme Court, the assessment of the advisor’s profitability remains a necessary step in the contract renewal process.

Read more...
 
Comparing the Cost Effectiveness of Service Providers - February 2009 Print E-mail
Written by C. Meyrick Payne of MPI & Simon Collier of Sondent Group   

     One of the difficult tasks that a fund director faces involves assessing the reasonableness of the fees charged by either an affiliated or independent service provider. The most frequent services are (1) transfer agency, which typically represents about 20% of fund expenses and is the largest fund expense other than investment advisory fees and distribution fees, (2) fund accounting, which may represent about 5% of fund expenses, and (3) administration, which might represent about the same.  A considerable part of the difficulty is that some tasks might be included under any of the three services, thereby making comparisons tricky. Another difficulty is that the contracts, although reported on a fund-by-fund basis, are typically negotiated on a complex-wide basis.

Read more...
 
The "Value Added" Contract Renewal Process - August 2008 Print E-mail
Written by C. Meyrick Payne and Jay Keeshan   
Since the inception of the Investment Act of 1940, one of the critical duties of mutual fund directors has been the annual approval or renewal of the investment advisory contract.  As part of the process, directors must review crucial data for each fund they govern, which includes comparisons with peers on numerous issues including investment performance, fees, and profitability. In addition to the profitability of the advisory contract, directors must review and evaluate any potential “fall-out benefits” to the advisor that may result from other fees charged to the fund (i.e. transfer agency or administrative fees).  A more recent SEC ruling in June of 2004 now requires that directors disclose information on how and why they came to various decisions they make during contract renewal.
Read more...