Fund managers told to take good with bad

Fund managers need to accept lower incomes in the bad years if they expect to reap big rewards in the good years, according to Tower Investments chief executive Sam Stubbs.

Thursday, January 26th 2012, 6:00AM 3 Comments

by Niko Kloeten

Stubbs made the comment at yesterday's Tower quarterly media briefing in Auckland, in response to a question about the recently reported survey on performance fees by Harbour Asset Management.

The survey raised concerns about the way some New Zealand equity managers calculated these fees, with investors possibly paying performance fees for below-market performance.

Stubbs said Tower charges performance fees on the same basis as Harbour for the small number of products where it has them.

He said "as a general rule" he agreed with the findings.

"If you have a performance fee so the headline rate looks low you're doing it for the wrong reason," he said.

"We should be prepared to accept low income in bad years if we accept good income in better years."

Stubbs said the "devil is in the detail" with performance fees, and said he looks forward to changes to KiwiSaver reporting requirements that will allow investors to compare "apples with apples" in that regard.

"If there's any lies or mis-truths about performance fees they're all going to come out in the wash. I think there will be some very interesting revelations that come out of it."

Stubbs also spoke out about "mischievous" reporting by media on the fees issue, saying KiwiSaver fees are actually very low.

He referenced a Morningstar survey that found fees for KiwiSaver balanced funds are much lower (0.93%) than their Australian counterparts (1.76%) and almost as low as for wholesale investors (0.85%).

"I'm looking forward to some more rational analysis on this in future."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 26 January 2012 at 12:01 pm Time Keeper said:

Surprised that Sam has time to comment - as one would have thought he would be flat out ringing up all those Default members that he has (in his words) a fiduciary responsibility to, to ensure that they are in the right investment fund.

Lets see....400,000 default people of which Tower has 1/6. That is roughly 66,000. Say it might take 30 minutes on average to deal with them (as some will tell you to go away, but then to really give some proper help to others an adviser would have to cover a bit of ground, especially if as Sam say these conversations lead to 80% of them moving) it could take 33,000 hours to talk to them all. Based on there being around 2,200 working hours in a year, this looks like about 15 solid years work for 1 person.

I guess the answer to how long it will take Tower to discharge their fiduciary responsibility will be a function of how many advisers they have to do the job. These would have to be in-house I am picking, as an independent wouldn't be into doing this.

Anyone got an idea how many qualified advisers Tower has?

Another fun bit of math would be to ask what 15 years of an approved advisers hard work would cost..........

Righto back to the phone to ring more Default clients.

On 26 January 2012 at 2:02 pm Interested Party said:

It’s refreshing to see a considered comment around fees & performance fees, as opposed to the “performance fees are bad” tripe that have occupied industry media of late. Whilst there is considerable room for improvement around fee transparency, the investor is only really interested in one thing: after-fees-performance

On 27 January 2012 at 10:53 am AJS said:

The Code states that advisors must act in the interests of the client and professionalism is about doing the best for your client. The only consequence of performance fees in this environment is to promote the use of dodgy benchmarks (as we see with the 90 day bill rate commonly quoted) and/or taking greater risk to possibly earn higher fees with the fallback to the base fee when the advisor fails; i.e. the advisor gets paid regardless of the risks. No wonder investors are cynical and sarcastic toward the industry and mostly doing their own thing rather than using 'professional' advice.

A proper performance scheme would have no base and potentially have the advisor handing over a refund when returns are lower than a proper benchmark. That would focus advisors' on minimising risks and maximising return at that level of risk and that might also promote lower fees too. I could imagine the market for financial advice would grow considerable when mum & dad investors begin to feel they are getting real value from their advisor.

An investor's opinion for what it is worth.

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