Changing the Probability of Winning for Active Investors
Westwood (WW) Sensible Fees™ reflects our philosophy and commitment to aligning with clients to help them achieve their investment goals. This innovative fee structure addresses the disconnect in our industry between fees and performance by reflecting the proper market rate for beta and fee symmetry relative to the potential of the asset class, giving investors a statistical advantage or “fee alpha” verses a typical high fixed fee structure. Westwood Sensible Fees™ levels the playing field for active investors by embracing the core principles of evaluating pure manager skill, addressing the low cost of indexing and protecting investors using risk-based fees, all of which we believe are of critical importance as we look ahead to a more challenging market environment.
As a high-performing equity market environment lifted most stocks over the last decade, the value proposition for active management in efficient asset classes such as U.S. Large Cap has been scrutinized by both institutional and retail investors alike.
Low active share, otherwise known as “closet indexing,” high turnover and lofty management fees all contributed to a trend of marginal performance results for active products relative to benchmarks. In response, many investors have chosen to reduce their allocations to active managers and increase passive holdings, particularly in efficient asset classes.
According to eVestment, just 27% and 34% of institutional Large Cap strategies have outperformed their benchmarks over a five- and 10-year period, respectively1. Performance net of fees for retail investors was even worse for mutual funds, which only saw 19% and 22% outperformance for the same five- and 10-year periods2, according to Morningstar Direct. As a result, mutual fund investors in these strategies paid a staggering $100 billion in expenses to underperforming asset managers over the last 10 calendar years.3
1 Data compiled from eVestment as of 12/31/2018 using the following Universes: US Large Cap Core (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Outperformance percentages based on net of fees performance. The US Large Cap institutional universe combines all reported strategies within the underlying core, growth and value style universes.
2 Data compiled from Morningstar Direct as of 12/31/2018 using the following Categories: US Large Cap Blend (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Outperformance percentages based on net of fees performance. The US Large Cap mutual fund universe combines all reported strategies within their underlying blend, growth and value style categories.
3 Mutual fund data compiled from Morningstar Direct as of 12/31/2018 using the following mutual fund categories: US Large Cap Blend (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Performance evaluation based on net of fees performance during each calendar year from 2009 – 2018. Total fees for each fund calculated using the Annual Report Net Expense Ratio and Net Assets as of each calendar year end. Funds in the data set are based on current constituents as of February 2019 and using historical data.
Westwood Funds are distributed by Ultimus Fund Distributors, LLC. (Member FINRA) Ultimus Fund Distributors and Westwood Funds (or Westwood Holdings Group, Inc.) are separate and unaffiliated.
A performance-based fee generally introduces the following risks: (i) Performance-based fee arrangements may cause Westwood to make investments that are more risky or speculative than otherwise; (ii) Westwood may receive increased compensation (compared to a fixed fee) based on unrealized appreciation as well as realized gains on assets in the client’s account, (iii) clients may pay a performance fee even if an account declines in value, and (iv) no compensation or refund is paid if Westwood underperforms the benchmark. Sensible Fees are only available to those investors which are \”qualified clients,\” as defined in Rule 205-3 of the Investment Advisers Act of 1940.
