Research house warns on performance fees


Published in the Investor Daily, April 2014 by Miranda Brownlee and Aleks Vickovich

Investors selecting funds charging additional performance fees need to ensure the fee structure of the fund aligns with its investment approach and objectives, according to SQM Research.

A communication issued by the property-focused research house said investors need to examine the underlying strategic thinking behind fund managers charging performance fees in order to determine whether or not such a fee structure is appropriate.

“SQM Research remains unbiased towards the adoption [of a] performance fee,” SQM Research investment analyst Aakriti Chona said in a statement. “However, [SQM Research] believes that the
performance fee measures should be in line with the long-term objective of the fund.”

The research house listed a number of factors it recommends investors consider when analysing performance fees, including whether the fund is measured against an appropriate benchmark; whether the fund applies an appropriate “hurdle rate” i.e. the return generated by the fund over its chosen benchmark index; and whether the performance of the fund is subject to a “high water mark” i.e. that the fund must “recover any previous underperformance before being eligible for a performance fee”.

“The ultimate decision rests with the eventual investor,” Ms Chona said. “It is our advice to the investors to be prudent in their approach and measure whether the fees being charged by the fund manager are cognisant with their investment approach and objectives and whether the fee structure is best suited for the investor or the fund manager themselves.”

Speaking to InvestorDaily, Dale Gillham, director of boutique fund manager Wealth Within, said when it comes to performance fee funds it can be difficult for investors to establish what they will be paying so it is important for investors to focus on a few factors.

“You shouldn’t be paying a performance fee on a negative return, regardless of whether it outperforms the index or the benchmark and the fund needs to have a high water mark before they start charging,” Mr Gillham said.

The SQM Research statement said that of the “funds [it is] in the process of rating”, the Resolution Capital Global Property Securities Fund is the “only fund within the global property securities peer group” that charges a performance fee, while in the infrastructure securities market, the Magellan Infrastructure Fund, RARE Infrastructure Value Fund and the RARE Emerging Markets Fund charge performance fees.


Back to Articles