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Do these global funds have performance fees worth paying?

26 April 2017

In this ongoing series, FE Trustnet takes a closer look at performance fee-charging funds and considers whether their returns justify the expense.

By Rob Langston,

News editor, FE Trustnet

Among both advisers and their clients, performance fees remain a contentious issue. Many point out that the charges can often favour managers over the investor.

The number of managers charging performance fees has fallen in recent years, however, as fewer investors have been willing to pay the charges.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says the firm remains sceptical of the structure for investors.

He said: “We’re not particularly keen on them, the risk being that often they are structured on a ‘heads we win, tails you lose’ basis by managers.

“That’s not to say they can’t be well-structured performance fees that aligns the interests of the shareholder with the manager, but these are relatively few and far between.”

Khalaf says the fees have traditionally been associated with absolute return funds, particularly those originating from the hedge fund industry, where the fee structure is more prevalent.

He added: “In many cases they were to linked to cash rates in the form of Libor and, given where they’ve been for the past 10 years, it’s not a big hurdle for managers to overcome.”

Yet, there are some funds that continue to charge performance fees.

Having previously covered UK equity funds, FE Trustnet now turns its attention to the IA Global sector to identify the top funds with performance fees.

Of the eight performance fee-charging global equities funds with five-year track records fees analysed by FE Trustnet, five were top quartile in the in the five years to the end of first quarter of 2016. Below we look at performance by several funds from the sector over a number of time periods.


Orbis Global Equity

The £26m four crown-rated Orbis Global Equity fund stood out as one of the sector’s most consistent performers recording top quartile returns over each of the periods examined by FE Trustnet.

The fund aims to deliver higher returns than global stock markets over the long term without taking on a greater risk of loss.

Overseen by the Orbis portfolio construction team and headed by William Gray, the fund has delivered a top quartile performance over one, three, five and 10 years. It doesn’t levy an annual management charge, instead relying on a performance fees.

Its 10-year return of 186.93 per cent to the end of the last quarter end is stronger than the IA Global sector average of 97.49 per cent.

Performance of fund vs sector & index over 10yrs

 

Source: FE Analytics

Hargreaves Lansdown’s Khalaf says it is unusual for an asset manager to not levy an annual management charge and to only charge a performance fee.

According to the fund’s key investor information document (KIID), it charges a 50 per cent performance fee on any return above the MSCI World index benchmark. Held in reserve, it is refundable in the event of underperformance relative to its benchmark.

However, its unique structure can mean investors are missing out on much of their outperformance of the index.

Adrian Lowcock, investment director at Architas, said: “Orbis run a novel approach to performance fees offering a refundable fee.

“So, on periods of outperformance the fund charges a fee which goes into a reserve. Fees can be refunded if the performance drops and there is a period of underperformance.

“There are no annual management costs charged by the fund manager, 50 per cent of the outperformance is charged so investors getting 30 per cent outperformance only benefit from 15 per cent.

“This is rather expensive as investors lose a big chunk of performance.”


Schroder ISF Global Smaller Companies

Another consistent performer among the IA Global sector is the Schroder ISF Global Smaller Companies fund.

The three crown-rated fund has boasted an equally notable run of performance over all time periods considered by FE Trustnet.

Over 10 years the fund is up by 172.29 per cent, over five years it returned 111.81 per cent return, beating the average sector fund return of 75.76 per cent.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

The $265.8m fund has been managed by Matthew Dobbs and Richard Sennitt since 2006 and aims to provide capital growth through investment in small-sized companies globally.

The fund had an ongoing charge figure of 1.34 per cent, according to its latest KIID. Subject to a high water mark, 15 per cent of the outperformance of the S&P Developed Small Cap index, the fund charged a 0 per cent performance fee in its most recent financial year.

Architas investment director Lowcock says the fund managers are supported by a large analyst base.

He added: “The managers' ideal portfolio holding has strong earnings and cash flow growth prospects in combination with a reasonable price.

“They communicate with regional portfolio managers about investment ideas, decide on regional allocations, and monitor the portfolio in order to avoid unintended bias,

“However the performance fee and high ongoing charge is a huge hurdle for the managers to overcome and makes it difficult for them to achieve outperformance of the benchmark after costs.”


Threadneedle Global Extended Alpha

The final fund is Threadneedle Global Extended Alpha, which has delivered top quartile performance over the three- and five-year periods under review in this research.

In the five years to the last quarter end, the fund has generated a return of 107.39 per cent and 60.45 per cent over three years, greater than the average sector fund return of 43.23 per cent.

Performance of fund vs sector & index over 3yrs

 

Source: FE Analytics

The £214.6m two crown-rated fund is managed by Neil Robson and Ashish Kochar and aims to grow the amount invested in the fund.

Like its UK-focused sister fund mentioned in the previous article, it invests in a combination of long and short positions.

According to its KIID, the fund has an OCF of 0.82 per cent. A performance fee of 20 per cent applies to outperformance of the MSCI All Countries World index. In the year to 30 April 2016, a performance fee of 1.44 per cent was charged.

Darius McDermott, managing director of Chelsea Financial Services, says while he isn’t a fan of performance fees he can understand their use if they are aligned with investor interests.

He said: “It has a reasonably high potential target and does have a high watermark.”

Architas’ Lowcock added: “As part of the extended range this fund can use derivatives to boost performance and manager skills by increasing its exposure in both long and short investments.

“So they can effectively increase exposure to their high conviction holdings as well as profit from views of selling the market.

“This isn’t an absolute return fund as the focus is on increasing benefit of fund manager selection. The fund can also use the derivatives element to reduce volatility.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.