High fund management fees are always a topic of hot debate, especially in recent years as interest in low-fee, passive funds continues to rise.
The argument is reasonable, but it seems that the focus is often too narrowly focused on high fees alone. We believe the issue is a little more complex than that – it’s not high fees themselves that are the issue, it’s paying high fees for poor performance (and quite rightly so). Like many things in life paying fees isn’t necessarily a problem, provided you are getting good value for money.
Paying for performance
Charging a performance fee, when structured correctly, makes sense. This is because it ensures true alignment of interests between the fund manager and the client. Some would argue this is the only way you can ensure true value as, if the manager doesn’t perform, then the manager doesn’t get paid. After all you can get market-like returns for a very small price from a passive index-tracking fund!
Performance fees need to be properly structured. You don’t want to see performance benchmarks set too low and you don’t want to pay for performance that is simply regaining earlier poor performance. Any performance fee structure should incorporate a high water mark. This ensures that clients aren’t forced to pay a performance fee until past periods of underperformance have been regained – that ensures real value for money.
There’s good value for money, and then there’s good value for money
We believe in performance fees, but we also believe in choice. This is why we offer two classes of our Equity Fund – Class A units that charge a base fee and a smaller performance fee, or Class B units that charge zero base fee and a higher performance fee.
Our Class B units mean you can get the index return for free and only pay for outperformance. If the Fund performs in line with the index (the S&P/ASX 300 Accumulation Index), or underperforms it, then the fund fee will be zero and Allan Gray pays the running costs. The fees kick in only when the Fund starts to outperform. Outperformance of the benchmark is shared with the investor at a ratio of 65% to the investor and 35% to us and the fees are calculated on a high water mark basis.
How to choose?
- Class B units are a real alternative for clients who are sceptical of the ability of active managers to outperform the market over the long term. If the Fund only tracks, or underperforms, the index the client pays zero fees. If the Fund outperforms the index, so the client is in profit, only then does the client give up some of the gain as a fee.
- If you believe this creates true alignment of interest between the client and the fund manager Class B units may be a good choice for you. We are a performance-driven business, if our Class B units don’t outperform we don’t get paid.
Everyone’s perception of value for money is different. We give our clients a choice when investing in our flagship Equity Fund. You can invest in exactly the same Fund, but choose the fee structure that best suits your needs. Whichever fee class you choose, you can rest assured that your interests and ours are aligned.
You can learn more about the Fund here, or speak to our Client Services team or your usual Relationship Manager.