<\/p>\n
Performance fees remain one of the most contested issues in fund management.<\/p>\n
Managers in favour of performance-linked pricing say they better align the interests of investors and managers by linking fees to results.<\/p>\n
Listen\/read:
Insights into SA\u2019s asset management industry
Coronation scraps performance fees
\u2018Not quite 6%\u2019 fees: How this structure protects investors<\/p>\n
Some industry players argue they can be unclear, difficult to compare and, if poorly designed, allow managers to benefit more from good performance than they suffer from weak performance.<\/p>\n
Coronation Fund Managers announced late last year that it would scrap performance fees on its remaining retail funds, moving entirely to fixed fees across its retail range.<\/p>\n
Pieter Koekemoer, head of personal investments at Coronation, says the shift was driven mainly by investor and advisor demand for fees that are easier to understand, compare and budget for.<\/p>\n
The complexity involved in measuring, disclosing and comparing variable-fee structures had become increasingly difficult to suit a broad retail market.<\/p>\n
Moneyweb approached seven fund managers to find out how they deal with performance fees.<\/p>\n
Industry insights<\/p>\n
Fund manager
\nApproach to fees
\nHow it views performance fees<\/p>\n
Allan Gray
\nUses performance fees on higher-risk active funds and fixed fees on lower-risk strategies.
\nSays performance fees should align investor and manager outcomes, with equal sharing of upside and downside performance.<\/p>\n
Coronation
\nEntire retail range now uses fixed fees. Institutional clients can still opt for performance-linked fees.
\nSays investors increasingly prefer the simplicity and comparability of fixed fees.<\/p>\n
Ninety One
\nSelected funds offer both performance-fee and fixed-fee classes.
\nSays performance fees can align interests, but investor choice and transparency matter.<\/p>\n
PSG Asset Management
\nUses a combination of performance-fee and fixed-fee structures.
\nSays well-designed structures can align manager and client interests.<\/p>\n
Sanlam Investments Multi-Manager
\nMostly fixed-fee structures; performance fees charged by some underlying managers and on hedge funds.
\nSays fees should reflect long-term outcomes and the value provided by managers.<\/p>\n
Stanlib Multi-Manager
\nHas largely moved away from performance fees, with limited institutional exceptions.
\nSays strong safeguards, such as fee caps and high-water marks, are essential where performance fees are used.<\/p>\n
Sygnia
\nUses performance fees on selected active strategies, while much of its broader range uses fixed fees.
\nSays performance fees should reflect sustained, risk-adjusted outperformance, with clear disclosure and investor protections.<\/p>\n
Concerns around performance fees are not new<\/p>\n
In a 2006 paper presented to the Actuarial Society of South Africa, actuary Johan Schreuder examined how performance-based fees were being used in South African investment management, drawing on unit trusts, institutional mandates and public fee information.<\/p>\n
He argued that fairness depends on how fees are constructed.<\/p>\n
Factors such as the base fee, benchmark, fee cap, participation rate and measurement period can significantly change investor outcomes.<\/p>\n
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A benchmark is the yardstick against which a fund\u2019s returns are measured \u2013 typically a market index, inflation-linked target or peer benchmark.<\/p>\n
Schreuder cautioned against using cash or inflation-linked hurdles for equity portfolios, saying these can reward managers for broad market movements rather than genuine skill.<\/p>\n
He also highlighted the importance of longer measurement periods, fee caps and high-water marks \u2013 mechanisms that generally require managers to recover prior underperformance before charging new performance fees.<\/p>\n
The debate continues<\/p>\n
Jo\u00e3o Frasco of Stanlib Multi-Manager takes a similar view. He sees a place for performance fees, but only if the methodology is robust.<\/p>\n
Some fee structures, he argues, use hurdles that are too easy to beat or lack fee caps.<\/p>\n
They may also rely on rolling periods that can allow managers to charge more than once for effectively the same performance.<\/p>\n
Sean Peche of Ranmore Fund Management began looking more closely at performance-fee structures after reviewing a client portfolio that layered performance fees in underlying balanced funds over and above advisor charges.<\/p>\n
That has led to broader questions around benchmarks and disclosure of fee structures.<\/p>\n
Peche questions the use of peer benchmarks, arguing that performance fees should ideally be measured against recognised, investable indices rather than internally constructed peer averages that vary across managers and fund classes.<\/p>\n
In his view, inconsistent benchmarks make it harder for investors to tell whether managers are beating a meaningful target.<\/p>\n
Peche is also critical of how some structures behave in practice.<\/p>\n
Frequent crystallisation (the point at which a performance fee is actually locked in and charged) and rolling high-water marks, he argues, can result in managers taking fees during strong periods without a comparable reduction when performance weakens.<\/p>\n
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Coronation\u2019s Koekemoer does not reject the idea that performance fees can improve alignment. He stresses though that well-designed performance fee structures are often very complex.<\/p>\n
Measures for investor protection \u2013 such as fee discounts during underperformance, longer measurement periods, and detailed benchmarking \u2013 can make fee models difficult to evaluate and compare across fund managers.<\/p>\n
The case for performance fees<\/p>\n
Managers that use performance fees argue that when designed properly, they can create a fairer relationship between what investors pay and what managers deliver.<\/p>\n
Performance fees generally combine a base fee \u2013 the standard annual charge for running a portfolio \u2013 with a variable element that rises or falls depending on performance.<\/p>\n
Read: Risks beneath the index and the opportunities beyond<\/p>\n
Shaun Duddy, who heads Allan Gray\u2019s retail product development team, says performance fees can be a useful way to align investor and manager interests.<\/p>\n
\u201cBut when it comes to alignment, the most important consideration is that the performance fee is symmetrical [moving up or down depending on performance].<\/p>\n
\u201cAny performance fee where you share on the upside, but on the downside you don\u2019t share exactly the same \u2013 that results in a poor outcome.\u201d<\/p>\n
Siobhan Simpson, head of SA Unit Trusts at Ninety One, says the principle behind its performance-fee structures is straightforward: \u201cInvestors incur a higher fee when they have genuinely benefitted from our active management skills, and they pay a passive-like fee when performance matches or falls below the benchmark.\u201d<\/p>\n
Ninety One says benchmarks must be anchored to what funds are designed to achieve.<\/p>\n
\u201cThis is a deliberate, philosophy-driven approach \u2013 the benchmark must reflect what the fund is actually trying to do for clients.\u201d<\/p>\n
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Read: Satrix and Sygnia tracker fund fees compared<\/p>\n
PSG Asset Management\u2019s equity-focused funds charge performance fees only once a fee hurdle or high-water mark is exceeded. The base fee on these funds is also typically lower than on comparable classes without performance fees.<\/p>\n
Preanka Naidoo, head of corporate investment solutions at Sanlam Investments Multi-Manager, says performance fees are charged by certain underlying asset managers, while Sanlam itself levies them only on hedge funds.<\/p>\n
\u201cThese benchmarks are useful in demonstrating a manager\u2019s skill and avoiding the practical challenges associated with constructing and maintaining an investable composite benchmark,\u201d she says of recognised peer-relative benchmarks used in the multi-manager environment.<\/p>\n
Sygnia says it does not use peer benchmarks, but uses high-water marks as a \u201cgreat mechanism\u201d to protect investors from excessive fees.<\/p>\n
The case for simplicity<\/p>\n
After years of using performance-linked fees, Coronation says simpler pricing has broader appeal in retail investing.<\/p>\n
Koekemoer adds that performance fees may be theoretically fairer because fees rise or fall with outcomes.<\/p>\n
But they also introduce layers of complexity \u2013 from benchmarks and measurement periods to high-water marks and fee calculations \u2013 that make comparisons difficult for investors and advisors.<\/p>\n
Even though fixed fees can create periods of imperfect alignment, retail investors tend to benefit from pricing that is straightforward to understand, compare and monitor.<\/p>\n
Markets remain competitive, he says, and managers that fail to justify their fees through performance will eventually face fee pressure or asset outflows.<\/p>\n
Read: A fund with 6% fees?<\/p>\n
#fund #managers #disagree #performance #fees<\/p>\n","protected":false},"excerpt":{"rendered":"
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