Article – BusinessDesk

Jan. 17 (BusinessDesk) – Harbour Asset Management has thrown a grenade into the murky world of managed funds’ performance fee structures, saying New Zealand funds managers seriously lag behind best practice and need to lift their game.

Harbour Asset lobs grenade at fund managers’ performance fees

By Paul McBeth and Pattrick Smellie

Jan. 17 (BusinessDesk) – Harbour Asset Management has thrown a grenade into the murky world of managed funds’ performance fee structures, saying New Zealand funds managers seriously lag behind best practice and need to lift their game.

The Wellington-based fund manager made up of the old AllianceBernstein team has changed the fee structure on its Australasian equity fund and says it is now the only local funds manager with a “highly recommended” rating from Morningstar, a private Australian research house that rates funds’ performance on both sides of the Tasman.

Harbour Asset used Morningstar’s five point model to establish both its own new fee structure and to conduct research on 11 “well-known” but unnamed New Zealand funds managers competitors.

The firm used its findings today to charge that rival fund managers are using sub-par benchmarks, especially those few which base their performance fees on whether they can outperform cash investments, or which constantly reset their benchmarks to take account of previous poor performance.

“This is especially relevant when returns are already so low,” said Harbour Asset portfolio manager, Andrew Bascand in a briefing for journalists. “Financial advisers need to be aware of the effects of both tax and fees. If not, their clients won’t be happy.”

Fund managers were typically calculating fund performance after deducting performance fees, and in one case did not disclose the basis on which the fee was calculated. That meant investors were often left with opaque disclosure from their fund managers, said chief operating office Jody Kaye.

“The New Zealand market is not operating at best practice,” Kaye said. “Performance fees are quite misunderstood.”

The research comes as Morningstar prepares to review the performances fees of New Zealand fund managers, and after the Financial Markets Authority released a guidance note saying it had fielded a growing number of queries about the reasonableness of performance fees and structures.

While KiwiSaver funds are required by law to charge fees that are “not unreasonable”, there is no legal definition of the term, and non-KiwiSaver fund managers are under no such obligation.

However, the FMA has recently cracked down on the fees financial advisers receive through commissions after the government introduced minimum education standards and a new licensing regime for the sector.

The five standards Harbour Asset has used relate to: an appropriate base fee and performance fee relative to the types of assets invested in; using a benchmark that tracks the same asset class as the investment; setting a performance hurdle and cap on the fee; setting a high water mark that means the fund has to recoup any losses before it can achieve a bonus; and setting the crystallisation period for the bonus at a minimum of 12 months.

One fund surveyed by Harbour Asset was resetting its “high water mark” every month, two others did not disclose clearly how often their resets occurred, and other three were on six-monthly resets.

The so-called high water marks could, in some cases, operate almost as “low water marks,” said Kaye. Half the funds surveyed had crystallisation periods of less than 12 months. Three of the 12 were awarding themselves performance fees as long as their funds outperformed simple cash investment, a result Kaye described as “surprising”.

Others had impenetrable formulas for calculating performance fees, and unlike Australia, there was little use of working examples to show how the fee structures worked in practices.

Over the 11-year lifespan of Harbour Asset’s fund, the new structure would see an annualised performance fee of 0.32 percent plus a 1 percent base fee, compared to 0.82 percent annual performance fee plus average 1.2 percent base fee for funds using a cash benchmark and a high water mark that resets every year. It also beats the 0.46 percent performance fee plus average 1.2 percent base fee for cash plus 5 percent, with an annual reset.

Darryl Briggs, Harbour Asset investment strategist, said annualised performance fees would be higher during periods of strong growth, but Bascand said the firm has capped performance fees at 10 percent, since anything more than was probably no more than “luck.”

Of the 12 local funds probed by Harbour Asset, just two used a relative index to track equities, with the remainder setting an absolute benchmark or using returns on cash as the basis. In terms of the high water mark, Harbour was the only fund that had a perpetual term, meaning performance fees couldn’t be paid if investors had lost money.

(BusinessDesk)

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