Fund manager woos advisers with radical fee structure

Orbis, which has a 27-year track record managing money for institutional and high-net-worth investors, made two of its strategies available to UK retail investors in January this year.

I think the traditional charging structure is fundamentally flawed. Dan Brocklebank

While fund groups traditionally charge a percentage on the amount of assets under management, Orbis only charges a performance fee.

The structure means that clients only pay a fee if the manager outperforms, at a rate of 50 per cent of outperformance, which is allocated to a ‘reserve’ pot that would be used to pay the client a refund in the same 50 per cent ratio if the fund underperforms.

Orbis is paid up to a third of the annual reserve, capped at 2.5 per cent of the fund’s annual net asset value.

Dan Brocklebank, head of Orbis Investments in the UK, said some advisers were very positive about their charging structure, but admitted others were still on the fence about it because it differs from the way most groups charge for fund management.

This comes as the Financial Conduct Authority published its scathing report on the fund management industry in November last year, which criticised active managers for the lack of price competition.

Mr Brocklebank said: “I think the traditional charging structure is fundamentally flawed because it incentivises the owner of the business to grow assets as much as possible in order to milk the revenue.

“Managing people’s money is a profound relationship of trust, and unfortunately our industry has a terrible reputation; it frustrates me to be part of that.”

He pointed out, for example, that it’s much easier to gain an extra 5 per cent in client assets than it is to gain an extra 5 per cent in performance, which means fund groups think the only way to grow profits is by growing assets under management.

But he said the “inconvenient truth” is that funds which reach a huge number of assets end up diminishing their future returns in the portfolio because they risk running into liquidity issues.

“It’s difficult to drive a super tanker,” he said, pointing to Standard Life’s £24bn Global Absolute Return Strategy (Gars) which he said is so hefty that it’s “extraordinarily difficult” to make a difference to returns.

The Orbis boss said some asset managers simply don’t care about the performance and “let the assets come flooding in” to funds, which he said was the worst outcome from his firm’s point of view. 

All other charges, including audit and legal fees, are covered by Orbis, and Mr Brocklebank said: “This means that if we only manage to track the index, then we will be cheaper than a tracker fund.”

So far, the Orbis Global Equity Strategy and the Orbis Global Balanced Strategy are available on several platforms, including Old Mutual International, AJ Bell, Raymond James, Transact, and Canada life International.

Orbis also confirmed that its funds will soon be included on the Novia and Aviva platforms, with the firm currently in talks with other platform providers to make their funds available to more UK investors.

But Dan Farrow, director of SBN Wealth Manager, said he was concerned that the performance fee could incentivise the fund manager to take more risk in order to get higher charges.  

He also disagreed with the comments made about traditional asset managers because all fund managers, regardless of what their fee structure is, need certain scale to make the business work.

Mr Farrow was also wary of Orbis covering all the other administrative fees, adding: “Who is funding Orbis to run this charity?”

katherine.denham@ft.com