Many moons ago, I mentioned in this column my leisurely lunch one fine summer’s day with Mr Ed Moisson from Lipper, during which we discussed the costs involved with fund management.
The focus of our discussion was on the rising cost of fund management, the wonderful new fee structures being introduced and the even more worrying trends on the mainland in Europe. Ed clearly knows his TERs from his common-or-garden onions and so I asked him to dig around in his database and examine how expenses are related back to performance.
Moisson has reported back and I have to say even a hardened cynic like me was astonished by his analysis .
First the obvious targets – fund of funds. It is probably no surprise to any of you that fund of fund unit trusts charge a bomb – they argue they are worth it and maybe they are. I actually think a great absolute returns manager is worth their weight in gold, but all I can say is there is a lot of gold going to be needed for the following funds: CF Miton Global Portfolio A – 3.14% inclusive TER; T Bailey Equity Income – 3.14%; New Star Portfolio Investment – European A 3.04%; Credit Suisse Multimanager Portfolio – International Growth 2.88%; and New Star Portfolio Investment Tactical A – 2.76%.
By inclusive, Moisson means the annual operating costs of the Fofs as well as TERs of the underlying, with overtly institutional and non-retail funds excluded and data based on Spring 2009 analysis. By comparison the lowest-cost providers in this fund of fund sector consisted exclusively of Fidelity and 7IM where the Inclusive TER ranged between 1.48% and 1.61%.
I shall make no more comment on these figures and move to the main focus of my annoyance – performance fees. I used to think these were a good idea because they linked the managers interest to those of the investor, but I now contend these are in fact a rotten idea and should be killed immediately.
I accept the argument they are encouraging fund managers to behave like errant trading desk investment bankers – “Yes, I am paid an absolute fortune already, but I want more”. The hedge fund comparison is difficult (where performance fees are of course standard ) – I would maintain the risk of bankruptcy and market failure is huge in this space. Big asset managers are not taking this binary risk.
Anyway, Moisson has run the numbers on performance fees and TERs for both unit trusts and listed investment trusts and there are some real shockers. First, those unit trusts for the retail market. Top of the pops was the Virgin Climate Change fund with 4.47%. Fresh, innovative thinking with a difference from a brand we can all trust – but not when you consider the fund has lagged the FTSE All Share since July of last year!
Runner up was BlackRock’s UK Absolute Alpha Fund which had a TER and performance fee that amounted to 4.21%, although to be fair performance in absolute terms has been impressive.
Runners up included Singer & Friedlander American Growth with 3.67%, Threadneedle American Extended Alpha with 2.54% and CF Absolute Return Portfolio Global Opportunities A also on 2.54%.
In the land of listed funds, top prize goes to Ludgate Environmental Fund with a whopping 6.71% followed (at a long distance to be fair) by International Biotechnology Trust at 2.94% and Invesco Perpetual UK Smaller Companies at 2.03%.
If all of these funds had doubled in value over the last year even I would accept a juicy performance fee was acceptable, but I think you know the truth of the matter.
I also bet all of these have very stringent criteria that reverse the performance fee and extract a heavy penalty for underperformance… or at least that is what the eternal optimist in me says.
One might also wonder whether Libor plus 2% performance barrier structures have any relevance in our low rates world.
I shall leave the last word on this all to Mr Moisson who adds: “These examples highlight that it is important for advisers and investors to really understand the fee structure. A fund that charges additional fees for performance above the base rate rather than an equity index, then fails to generate absolute returns, and charges a higher than average management fee seems completely unreasonable. For example, the French regulator does not allow equity funds to charge performance fees unless benchmarked to an equity index”.
David Stevenson is a Financial Times columnist and consultant. Email him at davidcstevenson@gmail.com
