Performance fee critic's fees found wanting

Harbour Asset Management, which slammed other fund managers over performance fees, changed its own performance fees after criticism by fund researchers.

Friday, March 9th 2012, 6:30AM

by Niko Kloeten

Harbour announced changes to the fee structure for its Australasian Equity Fund at the start of the year, while also writing a scathing critique of other fund managers and the way their performance fees are calculated.

Of the 12 funds assessed by Harbour, only its own fund passed on all five criteria: quantum; benchmark; performance hurdle and cap; high water mark and crystallisation period (the criteria were based on a report by Morningstar Australia).

But Harbour has admitted its fund fees wouldn't have ticked all the boxes before the changes were implemented.

Darren Howlin, a research manager for Australian fund management ratings house Lonsec, said Harbour's performance fee overhaul came after concerns were raised by his organisation.

The main problems were around the resetting of high water marks and the calculation methodology, which was "not at industry best practice", he said.

"They were resetting the high water mark on a six monthly basis and from memory the basis was from a positive return, meaning anything above zero... that could potentially work in favour of the manager.

"We want to see managers performing consistently above the high water mark to achieve those fees - we suggested that was an area that they should consider reviewing."

Howlin praised Harbour for its "proactive" approach, although he noted that "doesn't necessarily mean we think what they've done is the best", and an assessment would be made after a review process that kicks off in May.

He said Lonsec had raised similar concerns with other managers who hadn't been so quick to respond, and warned this could have an impact on the ratings given to these managers.

"If you consistently have a manager not taking onboard feedback and they have their head stuck in the sand, letting life blow past, we've got to raise that as a concern."

Harbour chief investment officer Jody Kaye said the company had originally based its performance fees on what it had seen from other New Zealand managers.

He said prior to the changes Harbour's fees would have probably failed in two categories - the crystallisation period and the high water mark, which it has now changed to being perpetual.

"It wasn't so much what was wrong with them in a New Zealand context - we looked at what we thought was best practice but it wasn't until we looked further afield that we found it wasn't Australasian best practice," he said.

"When you set up a product you look at the market you are operating in and look at other managers."

Kaye said the awareness of the issue in Australia is "a bit more sophisticated" than in New Zealand, and blamed "inertia" for the the lack of action by managers on this side of the Tasman.

"If research houses want New Zealand to move to best practice they need to start factoring that into their ratings. Until now there hasn't been any pressure to change."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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