The board of the £961mn Allianz Technology investment trust has revamped its performance fee after the manager received £24.7mn in 2020, with the performance of the trust barely beating the index over the past three years.
The trust's factsheet showed in the three years to the end of November 2022, the trust’s net asset value rose by 51.4 per cent, compared with the benchmark, which returned 49 per cent.
The total fee paid by clients of the trust was 3.66 per cent that year, with 2.88 per cent coming from the performance fee.
As part of the changes to the fee structure, Allianz is entitled to a performance fee of 10 per cent of any return generated above the benchmark. So if the trust beats the benchmark by 1 per cent, then Allianz receives 0.1 per cent of that return.
Previously the manager received 12.5 per cent of any outperformance of the benchmark.
The ongoing charge, that is the portion of the fee paid regardless of performance, has dropped from 0.88 per cent to 0.69 per cent.
The performance fee number is revealed in the Allianz Technology trust’s 2020 annual report.
Mick Gilligan, who runs the model portfolio service at Killick and Co, says much of the strong performance prior to 2021 came from just two stocks: Tesla and Zscaler.
While those helped deliver the performance which generated the fee for Allianz, they have underperformed sharply since the fee was paid, with all of the gains above the benchmark disappearing as the shares of Tesla and Zscaler have sold off.
Gilligan says the trust is differentiated from the benchmark.
He said: “It typically holds 60-70 stocks and so is more concentrated than the Dow Jones World Technology Benchmark. ATT also tends to have a greater bias towards mid and small caps and so will have struggled against the index in recent years for that reason.
"There are serious challenges ahead in 2023, not least the forthcoming earnings season and whether tech earnings can still support high valuations. I don’t think ATT fully reflects these risks on a 10 per cent discount, compared to the Polar Capital discount of 12 per cent.”
He said if a trust is levying a performance fee it needs to be compensating clients in other ways.
Gilligan said: “I’m not generally a fan but where it is in exchange for a management fee reduction and has a decent hurdle it can make sense.”
Philip Milton, who runs PJ Milton and Co, an advice firm and discretionary fund house in Devon, said: “For the same reasons we don’t levy them on clients, we usually work the hardest we possibly are obliged to do, when things are bad.
"We don’t indemnify clients’ losses and we don’t share their gains. The ideal is instead to charge a sensible and sustainable annual management fee and to justify that throughout – not fight to the bottom. One per cent seems fair.”
He added that there is a risk performance fees may encourage excessive risk taking by fund managers trying to achieve a performance target.
One example of this, cited by Milton, is the Chrysalis investment trust, which paid out a performance fee, split between the fund management company and the individual managers, of £112mn just as a period of sharp underperformance took hold.
The board of that trust subsequently confirmed it had altered the performance fee structure.
The trade body for the investment trust industry, the Association of Investment Companies, has a governance code which it believes investment trust providers should adhere to, which includes a range of criteria.
Nick Britton, head of intermediary communications at the AIC, said: “Performance fees are intended to align the manager’s interest with investors, so that an element of the manager’s compensation depends on achieving returns above a stated target.
"However, they clearly divide opinion and investors should make sure they’re happy with how performance fees are structured before they invest.
“For investment companies that invest in mainstream quoted equities, there has been a move away from performance fees in recent years, though they are still the norm in some more specialist sectors.
"Investment companies have independent boards of directors whose job it is to negotiate fees with the manager on shareholders’ behalf. In recent years we have seen a lot of fee changes that benefit shareholders – for example there were 27 such changes last year.”
The Allianz Technology trust’s share price has fallen by around a third in the past year, and is up 74 per cent on a five year view.
Andrew Latto, an analyst at Fund Hunter said: ""What is the point of paying a fee for outperformance in year one when it disappears in the two years that follow? A fee is paid for something that vanishes."
david.thorpe@ft.com
