Performance fee update – lesson for NZ
Pathfinder wrote a series of four articles through 2015 on performance fees which were published here on Good Returns. Off the back of these articles Pathfinder was asked to help Reuters Thomson in Europe with a piece on Italian performance fees. John Berry believes the findings of that work provide an important lesson for New Zealand financial advisers and the Financial Markets Authority.
Friday, November 25th 2016, 6:51AM 
2 Comments
by Pathfinder Asset Management
The background
Thomson Reuters (Milan) noticed that performance fees charged by Italian fund providers seemed to be higher than elsewhere in Europe. 2015 performance fees as a percentage of assets under management (or “AUM”) for European managers referenced by Reuters are below:
| Manager | Country | Performance fee as a % of AUM |
| Banca Mediolanum | Italy | 0.46% |
| Azimut | Italy | 0.43% |
| Banca Generali | Italy | 0.31% |
| Henderson Group | UK | 0.11% |
| Amundi | France | 0.01% |
| GAM Holdings | Switzerland | 0.07% |
Reuters’ focus was on the highest charge in the table - Banca Mediolanum. Mediolanum is a significant Italian fund provider with €37 billion under management, which is one and a half times NZ’s entire KiwiSaver market. Pathfinder was approached by Reuters Milan due to the lack of help from European fund managers in reviewing the performance fee structure.
How not to construct a performance fee
According to Reuters, investors in Mediolanum’s Emerging Markets Fund suffered an 8.3% loss in 2015 yet the bank earned a performance fee of 1.4%. How does that work? The explanation for Mediolanum’s performance fees are buried in its prospectus documents – which exceed 250 pages (and we thought fund prospectus documents in NZ were too complex and long!).
Mediolanum structured the performance fee in the most investor-unfriendly way possible:
- There is no high water mark – this means if the fund goes down and up again the manager can be rewarded twice for the same performance.
- The performance fee is calculated monthly - this is a ridiculously short period. If the fund is down 11 out of 12 months in the year and up one month, the performance fee is paid for that one month even if the fund is down for the year.
- The benchmark above which the performance fee is earned is a cash rate – yet equity benchmarks should be used for equity funds.
- There is no margin above the cash rate - if a cash rate must be used it should have a margin like +5% before the fee is earned.
The last two of these (the cash benchmark with no margin) are simply quite unbelievable. The cash rate is 3 month EURIBOR (the inter-bank lending rate for European banks – like LIBOR in the UK). The 3 month EURIBOR rate has been negative for well over a year!
Lesson for New Zealand – regulatory arbitrage
Mediolanum is the second largest promoter of funds out of Ireland. Issuing out of Ireland is curious, given it is selling to Italian retail investors. Could it be using Ireland because its performance fee structure would be illegal for an Italian issuer but is not illegal for an Irish issuer? (Ireland only has non-binding guidelines for performance fees, which Mediolanum’s structure does not comply with!).
There are 28 members of the Eurozone. Each country’s regulated banks and their funds have a “passport” to operate anywhere in Europe. An Italian issuer is free to use an Irish vehicle and then sell the fund into another European jurisdiction. Mediolanum appear to be “arbitraging” this regulatory flexibility by selecting a lenient jurisdiction and circumventing tougher home country rules.
Why is this relevant to NZ? New Zealand is entering a fund passport arrangement with Australia, Japan and Korea which is to be effective from the end of 2017. Singapore, Thailand and the Philippines and also expected to join. The FMA and financial advisers need to be aware of “regulatory arbitrage” opportunities as the passport structure is implemented and expanded. In Europe local regulators can stop funds being sold in their home market if the issuer has moved abroad to by-pass local rules, however the Italian regulator has not prevented Mediolanum’s structure (and was likely unaware of it).
End result?
Thompson Reuters published the performance fee story in October 2016 which subsequently appeared in an Irish daily paper. Reuters quote Massimo Doris (the CEO of Banca Mediolanum) as saying their performance fee structure is “perfectly legal” which of course is technically correct, but the fee structure is clearly not in the interests of their investors. He also added that the bank is now reviewing its fee structure.
There is a lesson in this for NZ’s financial advisers and the FMA – take care to protect NZ investors when our domestic fund market becomes increasingly integrated within the wider Asian region.
The Reuters News article by Danilo Masoni is available here:
John Berry
John Berry is a founder of Pathfinder Asset Management Limited and is an independent director of Punakaiki Fund Limited. Disclosure of interest: John Berry invests in all Pathfinder funds and in Punakaiki Fund Limited.
Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz
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Comments from our readers
Upon reflection, our little nation is punching well above its weight in a lot of areas. Although there is plenty of room for improvement. But enough said about the Ministry of Banking as Brent would say. Still seeing lots of advice that was great 20 years ago.
Better than the 40 years in Europe I guess.
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A huge indictment of the Italian/Irish regulators given that even our rules around performance fees look good.