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Milford must work harder for performance fees

Milford Asset Management is changing its performance fee charge, including a revamp of its “high water marks”.

Friday, September 4th 2015, 6:00AM 4 Comments

by Susan Edmunds

Its most recent financial statements show it received $20.3 million in performance fees in the 2015 year, up from $18.9 million in 2014. It earned $24.3 million in capped management fees.

High water marks are used to stop fund managers earning performance fees when they are only recovering past losses.

The new fee structure, revealed in its latest prospectus, gives Milford a higher bar to clear.

Absolute return funds will reset their high water marks after every six months of positive performance, regardless of their position relative to the benchmark.

If a $100 million fund aimed for 20% but achieved 10%, the new high water mark would be $110 million and the fund would have to achieve that before receiving any performance fee.

It would then receive 15% of the returns above the point, and investors would get 85%.

Relative funds have to carry forward their losses and recover from those before they earn a fee.

Milford managing director Anthony Quirk said the performance fees were set in 2007. “Back then there was very little to compare to in the New Zealand market on performance fees.”

He said it was time to update the model but it was important for clients to judge performance fees as part of the wider fee structure.

Milford promotes its low, capped management fees, which cover all fixed charges. The income fund has a 0.65% management fee, compared to competitors charging over 1%, Quirk said. Its active growth fund charges 1.05% in management, compared to 1.5% from competitors.

“Others have those fees and trustee and custodian fees,” he said. “We paid $5 million to those suppliers in the year ending March 2015.”

He said performance fees encouraged the firm to do well. “We don’t like the idea of clipping the ticket with a high fee no matter how we perform. [With performance fees] we share in some of the upside if we produce upside, it’s an alignment with investors that has struck a chord with clients and is a reason for our growth. People like the low capped fee and the fact we have to perform.”

Tags: Milford Asset Management

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Comments from our readers

On 4 September 2015 at 7:22 am gaman AFA said:
Well done Milford, but really, baby steps.

When though will you change what is really egregious about your performance fees? The Global Equity fund for instance pays a performance for returns above OCR +5%. Not bad when passive exposures are doing 20% or more. Would be interesting for someone to work out how much Milford has received in performance fees for performance well below a global equity benchmark. Taking a performance fee when you actually seriously underperform global equities is actually quite cheeky.
On 4 September 2015 at 9:29 am Brent Sheather said:
The real issue here, again, is the lack of regulation and the finger is pointed at both the ex-bankers in government and the ex-bankers at the FMA for the lack of action. In more civilized Western countries performance fees have to be calculated with reference to relevant benchmarks. Copping a performance fee for outperforming a cash benchmark isn’t acceptable and further undermines the public’s confidence in the investment world, not that it was high to start with.

I have brought these issues to the attention of the FMA many times and they trot out the old excuse that disclosure protects. Yet when I explain how the fee structure works to people with these sorts of products they are inevitably horrified and most exit the fund.
On 4 September 2015 at 1:47 pm R1 said:
This approach to performance fees is akin to the banks paying out bonuses while shareholders pay for their sins. I think such schemes serve to attract greedy people to work with such firms rather than ethical people who will truly work in the interests of their clients. It is not difficult to see a connection with a culture whereby employees make dodgy trades to artificially pump up performance at the expense of clients and others. If the FMA thinks this is acceptable to have such schemes simply because they disclose then I think it brings into question the ability of the regulatory to deliver on its charter.
On 4 September 2015 at 3:06 pm Dirty Harry said:
IOW Brent your information could be considered doing the proper "disclosure" on behalf of the manager. So it does protect the consumer, because once received, the disclosure prompts the consumer to change their investment. If disclosure is the answer, maybe fund managers ought to spell out prominently and in plain English, how they calculate their performance fees.

lol

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