While fewer funds are now charging performance fees, the practice still persists in some parts of the market.
Performance fees remain unloved among investors and advisers, who often feel they are an unnecessary incentive for managers.
Jason Hollands, managing director at Tilney Group, said: “While performance fee structures are common place on more esoteric strategies and asset classes such as venture capital, private equity and hedge funds, we’re sceptical when such fee structures are rolled out on long-only funds and would rather not see them in place.
“To justify these, we need to see evidence of very strong peer group-beating returns net of costs.”
Having previously considered UK performance-fee charging strategies and those in the global equities sectors, FE Trustnet now turns its attention to the regional sectors to identify the top funds with performance fees.
Below we look at the performance of funds by recording top-quartile returns in their respective IA regional sectors over several time periods. Of course, it must be kept in mind that past performance is no guide to future returns.
JOHCM European Select Value
The JOHCM European Select Value was a top-quartile performer over each time period under review by FE Trustnet to the end of the first quarter.
The €3.1bn fund has been managed by FE Alpha Manager Robrecht Wouters since 2003, who is supported by Luis Fañanas. It aims to generate long-term capital growth by investing in a portfolio of European equities.
It was a top performer over one, three, five and 10 years and last year generated a return of 22.43 per cent.
Over 10 years the four crown-rated fund has delivered a 153.2 per cent return compared with a 77.34 per cent gain for the average IA Europe including UK sector fund and a 68.25 per cent return for the benchmark MSCI Europe index.
Performance of the fund vs sector & benchmark over 10yrs
Source: FE Analytics
The team has a highly selective, value-oriented investment style with a preference for companies which generate high returns on capital. Its approach leads to a structural underweight in capital-intensive sectors such as financials and commodities.
Adrian Lowcock, investment director of Architas, said: “Manager Robrecht Wouters wants a concentrated portfolio with stocks showing a discount of 25 per cent or more.
“These companies must have growth but for him this is all about return on capital and not earnings. But most of all the companies must have relatively low volatility of earnings.
“Also most companies must have low capital intensity. The manager studies stocks in depth to look for quality and valuation characteristics.”
He added: “In building the portfolio there is a bias towards quality value but the fund also owns more outright value names. The portfolio can also contain up to 10 per cent special situations stocks. Portfolio turnover tends to be lower, much of which is down to adjusting weightings in the portfolio.”
According to the fund’s key investor information document (KIID), the fund has a performance fee of 15 per cent payable on the excess if the net asset value outperforms the MSCI Europe benchmark on an annual basis. Any underperformance is carried forward. Last year the fund’s performance fee was 0.66 per cent.
It carries an entry charge of 5 per cent and had an ongoing charge figure (OCF) for the year of 0.79 per cent.
GAM Star (Lux) European Momentum
The four crown-rated GAM Star European Momentum was another strong performer in the IA Europe including UK sector.
Managed by Gianmarco Mondani, Paolo Longinotti and Roberto Cantaluppi the €47.4m fund aims to generate consistent returns through investing in a portfolio of European equities.
The managers take a bottom-up approach and aims to identify companies likely to experience and benefit from an upward earnings revision. The fund was top quartile over three and five years and second quartile over 10 years. However, it has fallen to the bottom quartile over one year.
Performance of the fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over five years the fund is up by 102.47 per cent, compared with an 68.02 per cent return for the MSCI Europe benchmark and an 73.47 per cent gain for the average IA Europe including UK sector fund.
The fund’s KIID notes a performance fee of 10 per cent of a high water mark - the equivalent of the initial issue price - or outperformance of the MSCI Europe index, whichever is lower. It carries an entry charge of up to 3 per cent and had a performance fee for the year to 30 June 2016 of 0.56 per cent. Its OCF for the year was 2.2 per cent.
JOHCM Asia ex Japan Small and Mid Cap
Like its sister fund, the JOHCM Asia ex Japan Small and Mid Cap fund carries a performance charge, but has also delivered some strong performances.
Over five and three years the five crown-rated fund is top quartile, although it was bottom quartile over one year.
The $54m fund is overseen by lead manager Cho Yu Kooi and FE Alpha Manager Samir Mehta and aims to deliver long-term capital growth through investment in Asia ex Japan stocks with a market cap of less than $4bn.
Over five years the fund is up by 98.52 per cent, compared with an 57.50 per cent return for the MSCI AC Asia ex Japan Small Cap benchmark and an 60.07 per cent gain for the average IA Asia Pacific ex Japan sector fund.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Last year, however, the fund failed to outperform delivering an 11.37 per cent gain versus a 16.56 per cent return for the benchmark and a 25.66 per cent return for the average sector fund.
Analysts at Rayner Spencer Mills Group note that the managers look for small- or mid-cap companies that can grow into large-caps.
“Smaller companies can be more volatile, both in terms of share price and business performance in Asia and to mitigate these risks the manager looks for businesses which are cash generative and are likely to be able to fund expansion from internal sources,” it noted.
“The fund has developed a strong long-term record since inception, both within the peer group and versus its benchmark.”
According to the fund’s KIID, the fund has performance fee of 15 per cent payable on the excess if the net asset value outperforms the MSCI AC Asia ex Japan Small Cap benchmark on an annual basis. Any underperformance is carried forward. Last year the fund did not charge a performance fee.
It carries an entry charge of 5 per cent and had an OCF for the year of 1.21 per cent.