Asset manager refunds fees after underperformance

Asset manager refunds fees after underperformance

Investors in the Orbis funds have received a refund on the asset management fees they paid the fund manager over the past year, due to the fund’s relatively poor performance.

Investors in the £34m Orbis Global Balanced Fund and the £62m Orbis Global Equity fund pay no ongoing charges, but do pay a performance fee if the funds do well.

Both funds beat the respective benchmarks in 2017, and performance fees were paid to Orbis.

The Balanced fund returned 11.4 per cent in 2017, while the relevant IA Mixed Investment sector returned 5 per cent.

However, in 2018 the fund has returned 0.8 per cent before fees, underperforming the 3.6 per cent return of the index.

That has triggered a refund of the performance fee paid by investors last year, and this has led to the return earned by investors so far this year, rising to 2.2 per cent net of fees.

The Global fund returned 19.4 per cent in 2017, compared with 11 per cent for the MSCI World Index. That triggered a performance fee.

The fund’s return in 2018 year to date is 0.2 per cent before fees, considerably adrift of the 6.6 per cent returned by the MSCI World Index.

That has triggered a refund of last year’s performance fee, pushing the net of fees return to 2.3 per cent.

Dan Brocklebank, head of the UK operations of Orbis Investments, said he feels the practice of charging ongoing fees to investors creates a situation where the interests of the fund manager and the underlying investor are not alligned.

He said a charging structure where the bulk of the revenue earned by the fundhouse comes from ongoing charges incentivises the firm and the individual manager to focus on growing the assets of the fund so as to increase revenue, rather than keep the fund at the optimal size to maximise the return for investors.

Mr Brocklebank’s comments come in the wake of Fidelity announcing that investors in two soon to be launched passive funds, one of which invests in US shares, and the other in the global equity market,  will have zero ongoing charges or performance fees, but will generate revenue by engaging in stock lending.

The managers of the £802m Polar Capital UK Value Opportunities fund have justified the 10 per cent performance fee it levies on all outperformance of the FTSE All Share.

They state the investment strategy they deploy would cease to be effective if the fund were to grow beyond £1.3bn in size, so the managers have committed not to allow the fund go beyond that size, and are remunerated on the basis of performance instead.

The fund manager Neil Woodford’s Patient Capital investment trust doesn’t charge any fee unless the fund generates a return of 10 per cent in a year.

Philip Milton, who runs Philip Milton and Co, an advice firm in Devon, said his longstanding policy is to focus on funds that are smaller in size.