Generali Backs Kraus's Attack on Management Fees with $4 Billion

(Bloomberg) -- Assicurazioni Generali SpA showed its money-management ambitions with a $4 billion bet on a new firm headed by former AllianceBernstein chief Peter Kraus that seeks to turn the industry fee system on its head.

The commitment makes good on Chief Executive Officer Philippe Donnet’s promise to increase the share of earnings Generali gets from asset management. Kraus’s Aperture Investors aims to pay managers based on fund performance rather volume of assets, the companies said on Thursday. Customers will be charged low, ETF-like fees until their fund outperforms its benchmark.

“Portfolio managers will say they all want to perform, but at the end of the day, if they don’t, they get paid basically the same as when they do perform. The motivation is to gather assets,” Kraus said in a Bloomberg Television interview on Thursday. “Our revenue model shifts that and says you only get paid if you do perform.”

Generali is among insurers globally who have looked to the asset management industry to generate a stable source of returns from fee-generating products, recently holding talks with French firm Sycamore Asset Management to boost its number of funds. Former AllianceBernstein executive Tim Ryan joined in late 2016 and is helping lead the charge.

“This deal demonstrates Generali’s commitment to deliver on its plan of strengthening the asset management business,” Mediobanca said in a note on Friday. “Generali is going exactly in the direction where we believe the asset management industry should look at and it is doing so in a smart way.”

Generali will contribute as much as $4 billion of strategic investment capital for individual investment strategies run by Aperture, subject to board approval it said.

Kraus is expanding a project he started at AllianceBernstein, which last year won approval to introduce performance-based fees for U.S. mutual funds. The new venture comes at a time when money managers are being pressured by low-cost ETFs and money flowing from active managers to passive funds. Fidelity Investments this year introduced index mutual funds with zero fees, and the strategy attracted almost $1 billion in its first month.

Kraus’s effort may face an uphill battle.

“It is laudable that they are pushing the envelope,” said Jeffrey Ptak, global director of manager research at Morningstar Inc. “But how much money they attract will depend on how much they are able to outperform. I don’t think the fee structure itself is going to sell people on the product.”

Kraus thinks that his model will one day become the norm.

"Over time, call it the next 10 to 15 years, the industry will shift to revenue structures that actually are aligned with clients’ incentives," Kraus said. "Portfolio managers will struggle with this."

Kraus, 66, spent more than two decades at Goldman Sachs Group Inc. and was ousted as the CEO of AllianceBernstein last year as the firm’s majority owner began to reshape its operations.

Kraus has criticized the fund industry and the failure of active managers to outperform benchmarks. He’s also expressed concerns about the ETF industry, saying there can be mismatches in prices for the funds and the market indexes they track, according to a 2015 interview with the New York Times.

Kraus said he’s interviewed almost 100 portfolio managers leading up to starting the new venture.

"Most people have said I like being paid on a fixed fee because it’s too risky to get paid on performance," he said. "I actually don’t want that person."

©2018 Bloomberg L.P.