However, by automatically dismissing funds with this structure, investors run the risk of missing out on some of the most consistent open- and closed-ended funds available.
It is important to remember that most fund houses compensate for a performance fee by subsidising the annual management charge (AMC), and many also forget that most performance data – including that provided by FE Analytics and FE Trustnet – is inclusive of all fees.
Here are five portfolios that have managed to deliver top performance in spite of having an extra layer of charges:
JOHCM UK Equity Income
Like most of the funds under the management of JO Hambro, the £1.4bn UK Equity Income fund has an annualised performance fee of 15 per cent on anything achieved above its benchmark – in this case, the FTSE All Share.
According to FE Analytics, JOHCM UK Equity Income has been a top-quartile performer in its IMA UK Equity Income sector over one, three and five years, as well as since its launch in November 2004.
Its performance is particularly strong over five years. Only Unicorn UK Income has returned more over this period.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Originally launched in November 2004, James Lowen took over in September 2007 and was joined by Clive Beagles seven months later.
Under Lowen’s management, JOHCM UK Equity Income has returned 43.40 per cent. It has beaten its benchmark over this time – the FTSE All Share – and the IMA UK Equity Income sector average, which have returned 19.28 per cent and 13.4 per cent respectively.
Lowen and Beagles have a mid cap bias, and are currently backing financials more than any other sector – particularly insurance. L&G and Standard Life are both top-10 holdings.
The fund, which is currently yielding 4.6 per cent, requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.28 per cent. This is one of the lowest figures of all the retail funds in the UK Equity Income sector.
In a recent interview with FE Trustnet, Hargreaves Lansdown’s Richard Troue said he is backing JOHCM UK Equity Income to be one of the most popular funds this ISA season.
Insight Absolute Insight
Many Absolute Returns funds have a performance fee, including the £465m Insight Absolute Insight fund. FE Alpha Manager Reza Vishkai’s portfolio has an annualised performance fee of 10 per cent on anything above the 3 month Libid GBP index.
Our data shows that Vishkai and co-manager Sonja Uys have managed to consistently deliver top performance on a consistent and cumulative basis.
Along with Henderson Credit Alpha, Insight Absolute Insight is the only Absolute Return fund that is a top-quartile performer in its sector over one, three and five years.
Year-on-year performance of fund and sector
| Name | 2012 returns (%) |
2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) |
|---|---|---|---|---|---|
| Insight Absolute Insight | 6.42 | 0.24 | 9.16 | 10.3 | -0.16 |
| IMA Absolute Return | 3.41 | -1.26 | 4.32 | 8.61 | -3.6 |
Source: FE Analytics
The only year it did not manage to deliver a positive return was in 2008, when it lost just 0.16 per cent.
Insight Absolute Insight has a TER of 1.26 per cent – the fifth lowest in its sector – and requires a minimum investment of £5,000. It is a fettered fund of funds, investing only in portfolios managed by Insight.
Click here to read our latest interview with the Insight Absolute Insight team.
CF Odey UK Absolute Return
Another constituent member of the IMA Absolute Return sector, CF Odey UK Absolute Return has an even higher annualised performance fee – this time 20 per cent of any gains made.
It is a quasi hedge-fund, using long, short and market-neutral positions to achieve its goals.
Since its launch in May 2009, the fund has delivered 110.65 per cent – the best in the sector by some distance. This figure is significantly higher than its primary performance benchmark – cash – as well as its secondary one – the All Share.
The fund has, however, been significantly more volatile than the All Share over this period, let alone its peer group.
Performance of fund vs sector and index since launch
Source: FE Analytics
James Hanbury has managed the fund since launch, and was joined by Jamie Grimston in November 2010.
The £288m fund has a TER of 1.47 per cent and requires a minimum investment of £5,000.
Murray International Trust
Aberdeen’s Murray International Trust has been managed by star manager Bruce Stout since June 2004.
The trust has an ongoing charge of 0.75 per cent, but this does not include the impact of its performance fee, which currently stands at 5 per cent on every 2 per cent of outperformance against its benchmark.
According to the AIC, based on the recent performance of the trust, the ongoing charges figure inclusive of performance fee rises to 1.16 per cent.
Since Stout took over the closed-ended vehicle it has returned 287.07 per cent, compared with 95.74 per cent from its FTSE World ex UK benchmark.
On a relative basis, it has been the best-performing portfolio in its IT Global Growth & Income sector over the last five years, and the second best over three. It is currently yielding 3.77 per cent.
Stout invests predominantly in equities, but has some fixed interest exposure. He is currently overweight emerging markets, particularly the Asia Pacific ex Japan region, to which the fund has a 27.2 per cent weighting.
Murray International Trust is currently 11.6 per cent geared and as a result of its very strong performance, is currently trading on a 7 per cent premium to its NAV.
Scottish Oriental Smaller Companies
First State’s Scottish Oriental Smaller Companies IT, which is managed by Susie Rippingall, boasts top-quartile performance in its IT Asia Pacific ex Japan sector over one, three, five and 10 years.
Over the last decade the trust has returned 738.67 per cent, easily beating its MSCI AC Asia ex Japan benchmark, which has delivered 284.04 per cent.
Performance of trust vs sector and index over 10-yrs
Source: FE Analytics
In the last 12 months alone, the trust has made more than 45 per cent.
As its name suggests, the Scottish Oriental Smaller Companies IT invests predominantly in small caps. Its biggest regional weighting is China, followed by Singapore, Taiwan and Hong Kong.
Currently trading close to a 3 per cent premium, the trust has an ongoing charge of 1.01 per cent. However, given the stellar performance of the trust in recent years, the AIC shows this figure has risen to 1.96 per cent.
A recent FE Trustnet article highlighted First State’s use of the MSCI AC Asia ex Japan index as its benchmark, even though it has a specific small cap focus.