Performance fees excessive: van Eyk Research

Performance fees being charged by some fund managers in the Australian equities extension sector are excessive, according to investment research firm van Eyk Research.

After reviewing 10 fund managers in the sector, the research house found some managers were charging performance fees for simply outperforming the benchmark. Australian equities extension funds employ higher risk strategies designed to outperform core Australian equities strategies.

Van Eyk Research’s Chris Biggs said some funds are also charging performance fees without employing perpetual high water marks, which are designed to force the manager to regain previous underperformance before charging performance fees.

“We believe performance fees should only be applied when returns exceed the targeted outperformance of the fund manager’s core Australian equities portfolio, with perpetual high water marks applied,” Biggs said.

The peer group outperformed the S&P/ASX300 by 7.7 per cent on average, on a rolling 12 month basis to the end of September last year.

Biggs said this demonstrates the fund managers’ ability to generate additional alpha through the extension strategies employed, and in doing so outperform core Australian equities returns.

The strategies used to generate higher returns give these funds a correspondingly higher risk profile, which includes a larger tracking error than core Australian equities strategies. Van Eyk Research’s current risk rating for the sector is medium to high.

Another outcome of the review was the research houses’ suggestion that this may be a sector that is ripe for development.

“Most of the review group have capacity issues and there is scope for new quality fund managers to enter this space with retail products,” the group’s statement said.