The higher cost of finite capacity

Australian fixed income funds that focus on their wholesale offering have given a fee rise to the retail funds that do not receive as much attention, Jassmyn Goh writes. This is part three of the fee comparator feature.

Two retail Australian fixed income funds, which feature a lower minimum initial investment, had the highest annual fee charge within the sector at 1.5 per cent for the Australian Ethical Fixed Interest Fund and 1.2 per cent for the Realm High Income fund, according to FE Analytics.

Both funds said the fee charge reasoning was because those were funds that did not receive as much attention as other funds.

Australian Ethical chief investment officer, David Macri, said most of the firm’s funds under management (FUM) and flows went into their wholesale funds, and their fee charge was the cost of servicing their clients and establishing their investment universe that had to be satisfied by their ethical charter.

Macri noted that while they focused more on their wholesale funds that had a lower fee, they did not want to shut out investors who had less than $25,000 to invest.

According to FE Analytics, the fund had an annualised return of -1.83 per cent to 31 July 2017, 2.73 per cent for three years, and 3.78 per cent for five years. 

“We’re trying to get the beta exposure to that asset class. There’s not going to be much in alpha generation in terms of security selection and we think over the full cycle the process does lend itself to small outperformance,” he said.

The almost five-year-old Realm High Income Fund returned similar to the benchmark with a three year to 31 July 2017 return of 3.86 per cent, and a one year return of 4.83 per cent.

Realm’s founder and investment manager, Andrew Papageorgiou, said in terms of total FUM structure, the unit class accounted for two to three per cent of the firm’s FUM. 

“Whether it be a retail or wholesale fee class, the simple fact of the matter is we are running a fund that is finite in capacity,” he said.

“We’ve communicated to the market that the maximum amount that we are looking to raise in this strategy is $700 million. The reality is within fixed income the majority of funds are running strategies more than excess of $1 billion.”

He noted that the vast majority of money in their fixed income fund was invested within the adviser class of the fund with a fee of 0.77 per cent. 

“We want them to go to advisers because often credit instruments and credit funds can be misused by investors. It can be incorrectly used for proxies as cash and we value the contribution that the advisers make to the whole part of the process.

“To be blunt the amount we have within retail is miniscule, and it’s not a unit class that we spend any great amount of time in leveraging up in terms of getting more people through that door. Equally our focus is not on retail direct investors.”

For the almost one-year-old PE Capital Y fund, scale and covering costs were the main reasons for its 1.03 per cent fee, according to PE Capital’s chief operating officer for funds management, Anthony Mann.

“It’s just covering costs and we are predicting a 5.5 per cent return,” Mann said. “We outsource the fund management capability and the one per cent is covering our costs.”

Mann said he started the fund because there was demand for a liquid fund that returned better than term deposits. The fund currently has five investors and around $700,000 in FUM.

Mann noted that until there was more scale the fee would not reduce.

The DDH Preferred Income fund was the best performing fund in terms of performing above the benchmark where it only failed to do so for its 10-year return to 31 July 2017 at 4.26 per cent. The fund’s annualised return was at 8.43 per cent, three years at 3.98 per cent, and five years at 6.23 per cent.

The fund’s investment manager, GCI Australia’s director, chief executive, and CIO Renny Ellis said its good profits were from new issues and benefited from the on-going margin contraction in sub debt.

Ellis said 0.55 per cent of the 0.82 per cent fee was to GCI, and the rest for admin, custody, and responsible entity fees to DDH Graham.

“While I agree the MER [management expense ratio] is high for a debt fund we do actively manage the fund and have achieved and reported after fee returns above the target rate of return,” Ellis said.

“I inherited the MER and when I took over the fund from Evans and Partners so I cannot change it.”

The AMP Capital Corporate Bond H fund performed below but similar to its benchmark, and had a cumulative return five years to 31 July 2017 of 25.1 per cent compared to 28.2 per cent.

AMP Capital declined to speak to Money Management on its 0.77 per cent fee but provided a statement that said the fund managed to “deliver a specific outcome to an investor rather than to beat a benchmark”.

 

Part one

Part two

Part four

Part five

Part six