Incentive fees fail to deliver
Monday, 21 July 2008
The idea that when you give your money to an investment manager who is rewarded for performance is a good idea. It should be a win win scenario. Yet, whilst the idea is excellent, the reality is somewhat off the mark.
Steve Johnson of the FT July 20 2008 reports on latest research from Grant Thornton. He writes “The increasingly widespread adoption of performance fees by UK-listed investment trusts has benefited investment management companies but been of dubious benefit to investors, according to research by Grant Thornton…..The evidence suggests that the principal effect of performance fees has been to increase financial returns to the management companies.”
The problem for investors is they do not really know if the fund manager is capturing alpha - neither do they know if the benchmarks from which the fees are measured are actually fair and reasonable. In fact, the FT writes “Further, two-thirds of performance fees did not come with a high water mark, meaning a manager could be remunerated simply for returning a trust to its highpoint prior to a slide in net asset value.”
When a manager wants to introduce performance fees, clearly the lower the benchmark, the greater the opportunity they have of achieving performance fees. Also, the fund managers want the opportunity of repeating the performance, so only ever achieving a one off performance fee is not attractive to the manager. So one would think, from an investors perspective, increase the benchmark to a higher level. Yet that could mean the manager takes on more risk to be rewarded. If they fail, it’s your money they are speculating with. To some extent, it is a no win situation.
For most investors perhaps the answer is to say no to performance fees, and find a manager that is looking to capture beta with low charges.
Yes, it’s what we do. But common sense eventually tells you that…
Categories: Asset Class Management, Active Funds, Index Funds
posted by Murray Round Wealth Management @ 14:33,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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