Woodford Investment Management will not receive an annual management fee but rather a performance fee equal to 15 per cent of any excess returns over a 10 per cent cumulative hurdle rate each year and subject to a high watermark.
Craig Newman, chief executive of Woodford Investment Management, said: “Critics of performance fees in the past have pointed to conservative benchmarks that could mean a manager is rewarded even when a fund delivers negative returns. We won’t take this easy route. We will only receive a fee when the investment trust delivers what we believe is a challenging return, with a high watermark included.”
“The investment trust will not be levied an annual management fee and so this removes any notion of effectively double charging. We won’t be rewarded if we underperform.”
“The nature of the underlying investment means you have to be patient to be rewarded – and when we are, we will receive the majority of our fee in shares in Woodford Patient Capital Trust and not in cash.”
The trust’s ongoing annual expenses are not expected to exceed 0.35 per cent of total assets under management and will be paid out of the quoted stocks’ income with any excess given to shareholders as a dividend.
“This is a very appropriate way of further aligning the investors’ interests with that of the fund manager – and reinforces our strong belief in putting patient capital to work with the aim of delivering significant long-term returns,” Newman added.
Cantor Fitzgerald’s Charles Tan says the new fee structure is an innovation that may well prompt change in the investment trust world but not necessarily for small and more boutique operations.
“They have obviously given it a lot of thought and if others could follow suit that would be absolutely amazing. It is one in which the manager’s interests are 100 per cent fully aligned with those of the investor. It is very investor friendly,” he said.
“However, will others follow suit? I think that will be a bit tougher: there are not many fund managers that can pull off these sorts of fee structures because they need to pay the bills. Neil Woodford is in a very fortunate position because he has billions of pounds of assets under management. If they have bad year, for example, he is not in any immediate risk of closing down.”
“In a smaller, more boutique operation that might not be the same. He is also operating as a private business, but in a listed company you’d have shareholders knocking on your door if you have a bad year.”
Numis Securities’ Ewan Lovett-Turner says the lack of a base fee is a reform and could prompt others to follow suit.
“A well-structured performance fee can be a very positive thing when managers are only getting paid when investors are enjoying the returns as well. However, a cap on excess returns is also advisable because you don’t want them to get too carried away,” he said.
“There has been a change in how fees are paid over the past few years with trusts’ fees cut and performance fees taken away in 17 trusts. In the post RDR [Retail Distribution Review] world, boards have gradually taken the view that it is better to make things look simpler.”
Lovett-Turner says that may in some way reverse now, if more innovative structures are implemented.
Rowan Dartington investment director Tim Cockerill believes only large firms will be able to match Woodford Investment Management’s financial clout.
“Running a fund with this type of fee structure will mean that there are periods in which there is no fee paid – so to run this structure there needs to be other income sources for the manager, which clearly Woodford IM has. So I doubt that there will be too many ‘me too’ fee structures.”
“It may shake up fees more broadly for specialist funds which has to be welcomed, because whenever someone sets up a new fee structure such as this it’s competitive and the industry will be watching.”
Jason Hollands, managing director of Tilney Bestinvest, is sceptical that others will follow suit because of the costs.
“There’s no doubt this is an innovative fee structure but I don’t this is likely to catch on,” Hollands said.
“Woodford is able to do this as he is a wealthy guy who owns his own firm and therefore is in a position to forgo revenue in favour of a structure that potentially rewards him with equity in the vehicle. Your typical investment business needs cash based revenues to cover costs, pay staff and generate returns for their owners,” he added.
Woodford has one of the best track records of any manager with returns averaging 321.18 per cent across his funds and trusts since January 2000, which is as far as FE Trustnet’s data goes back.
Performance of manager versus peer group since 2000
Source: FE Analytics
This is more than three times the average return of his peer group.