Interview with JD de Lange by Jonathan Jackson
A lean five years for many fund managers have investors asking why they are paying such high representation fees.

According to the S&P Dow Jones, nearly three-quarters of all actively managed investment funds focusing on the top 200 stocks underperformed cheaper ‘passive investment’ index funds over the five years from 2009 to 2014. Further to this approximately two-thirds of active funds underperformed the S&P/ASX200 Accumulation Index between October 2013 and October 2014.

The numbers suggest that investors are paying fees for fund management failure. Some may say that is the risk they take. Others are asking what is the value in finding a fund manager who will tip a client’s money into an under-performing, vertically-integrated structure that, according to financial commentator Michael Pascoe, takes an extra hit through the inflated costs of the platform.

Then there is the problem of mind-set. Investors feel they need to chase supposed active management and pay higher fees and taxes for the privilege. The solution to this problem could be in a fee for performance management structure.

Johan de Lange is the Chief Operating Officer at Allan Gray. He says the reason fund management fees are so controversial is because there is no tangible object that can be priced and no way to predict future returns.

“If you wait three to five years and don’t get a return it is deflating,” de Lange says. “Then there is the very real problem of investment fees eroding returns.”

Thus Allan Gray takes a contrarian approach to the market. They charge a smaller base fee, but the majority of the fee is based on performance.

In the UK and through parts of Europe this is a heavily regulated, frowned-upon practice.

Investment optionsUK regulators are making it increasingly difficult for performance-based fund managers to operate. However the stated aim of the UK’s Financial Conduct Authority (FCA) Remuneration Codes is to ensure greater alignment between risk and individual reward. If this is the case performance based fees make sense.

As de Lange says, “You take a subjective approach and if you do well your client does well. Where the confusion and frustration exists is with active managers who aren’t very active, yet still charge significant basis points.

“I think it is very difficult to be an active manager. If it were easy there would have been more of the ilk of Warren Buffett and George Soros in the world. It is a very difficult industry and therefore difficult for clients to understand the strategy involved.

“The one thing that makes fund management different is you can move into the market initially for free, but you are willing to give passive fund managers 20-35 basis points to trade for you. In a six-year bull market, the value of this makes a lot of sense. However frustration abounds when the tide turns and those fees add no value.”

Performance-based fees align with that of the client. Those who instigate these types of fees will lose money if they underperform. They have thus structured their business to achieve above market value.

“Our business will only survive if we do well for the client and that has created a mind-set of having to be active,” de Lange says.

The aim of fund management should be to deliver outperformance. To that end fixed fees are flawed, particularly when many clients have little understanding of the product they are buying.


JD de Lange holds a B. Proc Degree (University of Pretoria) and is an admitted attorney and CFP in South Africa.