Performance fee questioned

More fund managers are likely to claim performance fees this year for returns that did not outperform the market, a researcher is warning.

Friday, April 27th 2018, 6:00AM

by Susan Edmunds

Fund manager Kingfish has been criticised for pulling in $2.4 million in performance fees when it underperformed the index. It invests in New Zealand equities.

Fisher Funds is eligible for a performance fee because the Kingfish portfolio achieved a return for the year to March 31 in excess of the bank bill index rate plus 7%, the performance fee hurdle, and the high-water mark.

The performance fee is formula-driven with half of the performance fee (exclusive of GST) applied by the manager to subscribe for shares in Kingfish at an issue price per share equal to the net asset value per share as at March 31, with the balance of the performance fee paid in cash.

A new high-water mark has been set.

Adviser Brent Sheather said the Kingfish NAV return was about 13.2% with imputation credits in the year ended March 2018 versus 16.7% for the NZ stock market average.

“So Kingfish underperformed the index by about 3.5% but still paid its fund manager a $2.4m performance fee plus GST. Kingfish is an actively managed fund but despite the rhetoric from fund managers about active outperforming passive we see that passive funds like the NZX 50 returned 15.9% and our other favourites like Midcap returned 19.9% and the TNZ Fund returned 14.5%.

“None of those funds levied a performance fee despite outperforming KFL. Kingfish also pays Fisher Funds a management fee plus other costs and the performance fee alone, on total assets of $250m, represents a charge of more than 1%. KFL implements an ongoing buy-back programme to ensure that its share price does not trade at a big discount to its NAV however my view is that the reason KFL trades at a discount to NAV is its fee structure.”

Christopher Douglas, Morningstar’s director of manager ratings for the Asia-Pacific region, said it was a function of the market conditions.

“Investors in funds with performance fees based off a cash-plus hurdle should all expect some large fees as a result of the strong returning sharemarket in 2017. In a number of cases, fund managers will be getting some very high fees without any regard for skill or the ability to outperform the market. This is the nature of many performance fee structures in New Zealand.”

AUT associate professor Aaron Gilbert said performance fees were a concern and many investors might not even realise they were paying them.

There was a fundamental issue of fund managers not benchmarking themselves appropriately, he said. “If they’re not benchmarking themselves properly then they’re getting paid even when they're not adding much performance, or even underperforming, and that’s not very fair to clients.”

Fisher Funds chief executive Bruce McLachlan directed inquiries to the NZX announcement of the fee.

Tags: Fisher Funds Performance fees