When fund manager fees outstrip performance

Money Management’s inaugural Fee Comparator feature has confirmed the reality that while investors are prepared to pay for out-performance and to meet objectives such as environmental sustainability, fund managers must ultimately be seen to deliver on their promise.

Utilising FE’s analytics, Money Management’s journalists drilled down on fees and performance across the various asset allocation sectors and, legacy products aside, there was no disguising the reality that viewed purely on the basis of ‘quant’ a number of managers have cause to consider whether they are actually delivering value to investors.

The Fee Comparator exercise comes ahead of FE launching its quantitative Crown Fund Ratings in Australia aimed at helping investors identify funds which have displayed superior performance in terms of stockpicking, consistency, and risk control.

The FE Money Management Fee Comparator exercise is important because it provides a snapshot of fees in the various funds management sectors ahead of the Australian Securities and Investment Commission’s implementation of Regulatory Guide (RG) 97 intended to provide greater transparency around fees and costs.

However, there are mitigating factors where performance falls short of the fees charged, and as Money Management’s recent feature on environment, social and governance (ESG) investing and fund manager Australian Ethical make clear, there is a price to be paid for applying ethical screens just as there is a price to be paid for intensive research into the balance sheets of small companies.

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Very often, savvy investors are prepared to pay that price.

Equally, as BT Financial Group pointed out, changing times can alter perceptions of fees and value for money.

“Across the industry there are a range of fee structures that were developed to reflect the different arrangements and areas of demand that were relevant at the time of investment,” BT said.

What is also evident from the FE data and the explanations provided by the fund managers, is that few investment methodologies are fit for purpose all the time.  

Those sorts of explanations aside, it is unsurprising that in the Australian equities space it was the microcap and smaller companies funds which emerged at the upper end of the fee spectrum but, as was pointed out by Australian Unity’s general manager of investments,

Geraldine Barlow, the nature of the sector requires more intensive and therefore more expensive research.

The task for financial planners and dealer group investment committees is therefore to determine whether the returns generated by such funds justify the level of fees and, on the face of it, the FE data suggests that a number of fund managers who have reduced their fees over the past 18 months, including Kerr Neilson’s Platinum Asset Management, were justified in doing so.

Platinum in April cut its base fee from 1.5 per cent to 1.35 per cent and as low as 1.1 per cent when combined with a relative outperformance fee of 15 per cent and it was a move which arguably took Platinum outside of the range of the FE Money Management Fee Comparator radar.

There are certainly winners and losers in the Fee Comparator exercise, and the charts accompanying each sector analysis have shown for instance that top five funds in terms of low fees and better performance in the Australian equities sector are the Franklin Templeton Australian Equity Wholesale Fund, the CFS Realindex RAFI Australian Share-Class A, the Lazard Australian Equity I, the Allan Gray Australian Equity A, and the Macquarie Australian Equities Fund.

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