Incentive fees stimulate investment advisors

Article Abstract:

In November 1985, the Securities and Exchange Commission lifted its ban on performance-based fees for managers of large institutional funds (such as pension funds). Prior to this rule change, most investment managers were paid fixed fees related to the amount of assets they managed. Incentive fee arrangements are described and explained, including: base fees, performance objective fees, bonus formula fees, fee limitations, symmetrical fulcrum fees, and asymmetrical fulcrum fees. Hypothetical examples of manager performance are included to illustrate incentive fee calculations. Some advantages to payment of fees based upon performance are identified, including: incentive fee systems only compensate the manager for actual results, since they will be paid based upon upcoming (rather than past) performance; and incentive fees cause managers to pay more attention to aspects of investments (such as cash position, transaction costs, and execution). Development of a fair incentive fee system is also discussed.

United States, Analysis, Innovations, Laws, regulations and rules, Investment advisers, United States. Securities and Exchange Commission, Institutional investments, Investment analysis, Securities analysis, Incentives (Business)

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Real estate builds up investment returns

Article Abstract:

Real estate investments (investing in existing buildings and developed real estate) generally provide yields of seven to nine percent, but developmental real estate investments (the higher risk investment associated with planned but unconstructed real estate developments) can yield eleven to thirteen percent on cash invested. Consequently, corporate pension plans have been increasing their investment in real estate equities since the early 1970s. In developmental real estate projects, there are six stages of investment: (1) assessing profitability of the project by type and location, (2) obtaining regulatory approval for the project, (3) financing the project, (4) constructing the project, (5) leasing the real estate, and (6) operating the project. By investing at an early stage of a project's development, pension plans can take advantage of 30 to 40 percent project appreciation rates.

Real estate investment, Real estate investments, Real estate development

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Pension funds target overseas markets

Article Abstract:

Investment in foreign securities by managers of U.S. pension funds reflects the better performance of foreign securities markets and the diversification of risk available from foreign investments. Foreign securities investing began in the late 1970s for most pension fund mangers. By 1980, approximately $3.5 billion of pension funds were invested in foreign markets, and by 1985, this overseas commitment had grown to $27 billion. In proportion to the more than $1 trillion assets controlled by pension fund managers, the foreign investments are not large; however, these percentages are also changing: in the 1970s, pension funds generally sent only 3 to 4 percent of their investing assets overseas, whereas today the foreign investments represent closer to 8 to 10 percent of total pension fund assets, with heavy overseas investors risking as much as 15 percent of their total fund assets.

International aspects, Risk management

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