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Performance fees' days may be numbered

More fund managers may follow Forsyth Barr’s lead and drop performance fees, as the Financial Markets Conduct Act regulations kick in, it has been claimed.

Wednesday, August 17th 2016, 6:01AM 1 Comment

by Susan Edmunds

John Berry

It was revealed this week that Forsyth Barr was dropping its performance fees on its Australian and New Zealand equities funds, which had been charged if they beat the annual 10% return hurdle.

The fund manager said it was a move designed to make things clearer for customers.

Managers across the industry are overhauling their company collateral in line with the FMCA, which has introduced stricter and more prescriptive disclosure requirements, which make it easier for investors to compare funds.

John Berry, of Pathfinder, which does not charge performance fees, said he would expect to see fewer instances of the fees being charged, in future.

He said, unless the manager was truly outperforming the market they invested in and their peer group, it would be much harder to sell performance fees to clients in the new FMCA requirement.

Berry said there was significant pressure on fees in the market anyway, and the new, more transparent disclosure added to that.

“With disclosure standardized, it is much easier to compare what funds are really costing, which is a good thing for investors and financial advisers,” he said.

Managers now must disclose not only their own performance fees but any charged by their underlying managers. They must also show with numbers the impact of their performance fees, not just describe them in words.

“That really focuses the mind on what you’re paying,” Berry said. 

Most managers would use the average performance of the past five years to demonstrate the impact of fees.  Berry said that made them much harder to justify to investors.

Adviser Simon Hassan agreed. “I think the FMCA disclosure rules for funds are good, and will encourage others currently charging performance fees to review this practice and either discontinue or make sure investors benefit,” he said.

University of Auckland finance lecturer Paul Geertsema said the Forsyth Barr 10% hurdle was a bit unusual. “Hurdle rates are more typically linked to a market benchmark such as the NZX50 for NZ or the SP500 for US. Using a fixed 10% hurdle rate is not really performance linked - if the market goes up 25% and their fund goes up 15%, they are rewarded with additional performance fees despite under-performing the market under the old arrangement."

He said increasing competition from ETFs could become a feature of the New Zealand market over time.

Tags: Pathfinder Asset Management Performance fees

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Comments from our readers

On 18 August 2016 at 9:14 am Pragmatic said:
Ironically performance fees for boutique high performing capabilities are expanding globally, as access to Managers who actually perform increasingly becomes capped.

I guess the challenge is that Managers must first perform, before they become eligible for any remuneration - something that's a challenge for many domestic Managers

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