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Better disclosure of performance fees needed

Some of the performance fees charged by fund managers are “disgraceful, but legal”, Pathfinder Asset Management director John Berry says.

Wednesday, December 3rd 2014, 7:04AM 3 Comments

Berry has just completed a review of performance fees and says that some of the practices in the market need to change.

“If industry won’t self regulate then the FMA should step in and it should be prescriptive (in its approach)," Berry told delegates at the SiFA Conference in Christchurch this week.

He isn't against performance fees, rather he would like to see better disclosure about how they work and what they mean for investors.

The only manager he was prepared to name at the SiFA conference was Fisher Funds which provided a clear explanation and examples of how its performance fees worked.

Other managers made it very difficult for investors to understand the fees.

“It is not done by accident,” he says. Rather it is done by “clever drafting of documents.”

Most people would not be able to pick up what was happening when they read the documents, he said.

His message to advisers was to “be direct” when questioning fund managers.

“Good disclosure is absolutely critical,” he said.

Amongst the issues identified are that some managers have inappropriate benchmarks for their performance fees.

Berry says an equity fund should have an equity-related benchmark, not a cash one.

He also was highly critical of managers who double-dipped on fees which had high water benchmarks. In some instances managers claimed a performance fee when they reached a high water mark. However if the fund fell below that benchmark then went through it again the manager would claim the fee for a second time.

A third issue he identified was when a manager used an international fund. He said much of the outperformance would not make it to the investor as both the international manager and the local manager were each taking a performance fee payment.

To read more on Pathfinder’s research read this feature in the Good Returns Investment Centre.

The perfect performance fee: Part One

The performance fee: Part Two

« FMA boss: Adviser legislation trickyIFA working on pro-bono offering »

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Comments from our readers

On 3 December 2014 at 7:33 am Pragmatic said:
An extension of this useful discussion is the appropriate charging of fees for services rendered. If a Manager provides a passive / quasi-passive exposure to a sector / asset class then this should be reflected in their price. A typical price for a passive equity fund is circa 25bps, with other gateways even cheaper. If a Manager provides an active service (and can support this with constant - say 5y+ - outperformance of a relevant benchmark) then this may justify a higher fee... and in some cases, a performance fee.
Whilst this should be logic, sadly NZ seems to attract a few good marketers who coerce industry participants into supporting passive strategies at active prices...
On 3 December 2014 at 8:48 am thombentley said:
This was an excellent and thought provoking presentation by John. There are certainly some 'creative' performance fee structures out there.
Another thing to look out for is the ability of the manager to reset the high water mark in as little as 2 years. I would like to see a LOT more transparency around NZ funds, including a published MER/TER each year and transparency of holdings down to the individual stock level. A reasonable way to get a rough TER for funds is to look at the annual unit trust accounts, where fees are fully disclosed. In this way I could see that one well-known specialist fund manager had a TER of around 10% on one of its funds ($2.7m of fees on an average FUM of around $27m). Of course, you won't find that published anywhere on fact sheets or marketing material.
On 3 December 2014 at 11:39 am Peter Urbani said:
Excellent presentation and points by John. I am philosophically opposed to resetting the High Water Mark (HWM) at any point. The whole point of performance fees is to align the interests of the manager with those of the client so that s/he shares in the upside performance. Resetting the HWM and taking 'performance' fees from that point is effectively increasing the managers share of the profits and should not be allowed. Where performance fees are charged, any fixed fees (admin, safe custody, audit etc) should be lower than the average fixed fees of similar funds with fixed fees only.

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