How Should Fund Managers be Compensated?

[Kevmeister]

I know that at least some forumites have investments in managed funds as well as property.

With the horrendous returns we have seen for the last couple of years (ie. -ve), it got me thinking about the fact that fund managers still continue to recoup their 2% (approx) management fee from you, regardless of whether they are making you money or not.

Would you ordinarily gladly hand over 2% of your principal to someone who lost money for you?

So I thought I'd post on the forum what people thought might be a fairer way for fund managers to be compensated. Some examples:

1. Fee paid only if +ve earnings.
2. Fee paid only if earnings > nominated rate.
3. Fee paid only if earnings > industry benchmark (eg. All Ordinaries).
4. Additional fees paid if over-and-above a nominated rate.

Obviously competition plays it part to prevent fund managers resting on their bums whilst still earning healthy "management fees", but given that a lot of these funds have either hefty entry or exit fees, it is not a trivial decision to move one's money from one fund to another subject to poor performance (accepting that some fund brokers will rebate most entry fees making the exercise less costly).

Personally, I'm sick of this fees-for-no-result policy.

 

[Sim]

Given that there are ongoing costs in managing most "active" funds - they will need an ongoing income, even in a bear market.

I would think a lower regular fee (less than 1% of funds under management) - plus a bonus of x% for every y% of performance greater than some chosen benchmark - might work.

Or are you asking for a guarantee that your fund will always increase in value ?

 

[geoffw]

Kev,

Sounds very close to the structure I believe Steve Navra was proposing for his fund.

 

[Lotana]

Kev,

I think the fee structure should be different for different funds. If we talk about a typical share fund investing 75-95% of its funds in Australian and overseas shares, as an investor I would prefer a relative performance based fee structure. Something like a fixed small account administration fee (I'd be happy with $5/month independent of the balance of my account) plus up to 25c of each dollar they earn for me above the benchmark.

Example 1:
Balance at year start $50,000
Admin fee $60
Net fund return before tax 10%
Benchmark 10%
No fee on top of the $60.
Balance at year end $54,940
Return 9.88%

Example 2
Balance at year start $50,000
Admin fee $60
Net fund return before tax 15%
Benchmark 10%
Fee 1/4 of 5% of $50,000 = $625
Balance at year end $56,815
Return 13.63%


Am I dreaming?

Lotana

 

[Kevmeister]

Sim',

I wasn't proposing that my fund should always increase in value (although that would be *nice*). But I don't think the current scheme makes the fund managers truly accountable for what they do, or not in a direct-enough manner.

 

[Steve Navra]

Hi Kev,

We will be launching our 'Premier Blue Chip' fund using exactly the fee basis you suggest.

Fund management fee only earned based on exceeding the index.

We don't perform - then we don't get paid! simple as that.

This is exactly what our clients have asked for. (Actually in the light of current managed funds returns; better make that what our clients have BEGGED for!)

Note however that as per usual, Sim is correct:

There are standard fees that do NOT form part of or relate to what the fund manager receives: For example the administration - the monthly statements that you receive, et al.

Also you can't expect to have positive returns every year, (Although to date I have never had a negative year!) so a performance fee based on exceeding the index is valid.

So hopefully this will be the start of the end for inefficient fund management!!

AND 'tis about bloody time


Steve

 

[Kevmeister]

And will you have Entry or Exit Fees?

 

[Steve Navra]

Hi Kev,

I posted a reply to Monique in "Meeting Point" which covers some detail regarding the fees.

Steve