Picture: ISTOCK
Picture: ISTOCK

SA asset managers have to think differently about their performance fees to encourage fairness, transparency and reduce complexity, industry experts say.

Speaking at Morningstar’s annual adviser conference, Nedgroup Investments MD Nic Andrew said funds should start earning performance fees once they get to the highest mark so investors would not have to pay for performance they did not receive.

“We aren’t saying performance fees are bad. They are fine as long as they are fair and simple. Generally we find that they increase complexity, so that’s why we only have them on low-risk funds where fees can be lowered when there is a low-return environment,” he said.

Andrew said Nedgroup only charges performance fees on two of its low-risk funds and such fees are capped at 10% of the fund’s performance. If the fund underperforms the performance fee becomes zero.

The asset management companies had a hard time fielding questions from advisers about why investment performance fees in emerging markets such as SA are higher than in developed markets. They also raised concerns that there are too many fund classes and complex fee structures that it make it difficult even for them to explain these simply to their clients.

Tamryn Lamb, from Allan Gray — the asset manager that received criticism for having one of the highest fees — said while they recognise that too much complexity prevents fees transparency, it is sometimes necessary to have many layers in order for asset managers to adjust the fee to zero when funds perform badly.

“That additional matrix of being able to lower the fees to zero is not that complex, but it is more complex than a flat or fixed fee…. Sometimes a well-designed performance fee structure needs to have a certain level of complexity to get real fairness for clients. A well-designed performance fee goes up and goes down so that the client can pay zero if there is underperformance,” she said.

Lamb said while Allan Gray was “without a doubt” on the upper end of the fee range, it is because of the performance it delivers to clients. “Of course clients have to question fees, but we know we have to perform so that we can defend our fees,” she said, adding that the company is improving its fee structure.

But Alida de Swardt, CEO of RMI Investment Managers, said a big part of the total investment fees investors pay is located elsewhere in the value chain. “The other big pieces go to advice and distribution. The industry’s complex structure has created many fee classes,” she said.