Performance fees excessive: van Eyk Research
Performance fees being charged by some fund managers in the Australian equities extension sector are excessive, according to investment research firm van Eyk Research.
After reviewing 10 fund managers in the sector, the research house found some managers were charging performance fees for simply outperforming the benchmark. Australian equities extension funds employ higher risk strategies designed to outperform core Australian equities strategies.
Van Eyk Research’s Chris Biggs said some funds are also charging performance fees without employing perpetual high water marks, which are designed to force the manager to regain previous underperformance before charging performance fees.
“We believe performance fees should only be applied when returns exceed the targeted outperformance of the fund manager’s core Australian equities portfolio, with perpetual high water marks applied,” Biggs said.
The peer group outperformed the S&P/ASX300 by 7.7 per cent on average, on a rolling 12 month basis to the end of September last year.
Biggs said this demonstrates the fund managers’ ability to generate additional alpha through the extension strategies employed, and in doing so outperform core Australian equities returns.
The strategies used to generate higher returns give these funds a correspondingly higher risk profile, which includes a larger tracking error than core Australian equities strategies. Van Eyk Research’s current risk rating for the sector is medium to high.
Another outcome of the review was the research houses’ suggestion that this may be a sector that is ripe for development.
“Most of the review group have capacity issues and there is scope for new quality fund managers to enter this space with retail products,” the group’s statement said.
Recommended for you
The month of April enjoyed four back-to-back weeks of growth in financial adviser numbers, with this past week seeing a net rise of five.
ASIC has permanently banned a former Perth adviser after he made “materially misleading” statements to induce investors.
The Financial Services and Credit Panel has made a written order to a relevant provider after it gave advice regarding non-concessional contributions.
With the election taking place on Saturday (3 May), Adviser Ratings examines how the two major parties could shape the advice industry in the future.
