The perfect performance fee: Part One

Performance fee components 

Performance fees are intended to both encourage and reward excellence in funds management.  They are not standardised so understanding and comparing them can be far from simple.  Here is a performance fee description which we will use in this commentary –

If the return after fees of a fund exceeds a hurdle rate then the manager receives a share of the excess gains. The hurdle rate will be the market return (measured by an appropriate benchmark) plus a specified margin (reflecting risk taken by the manager above broad market risk).  The performance fee will only be payable where the high water mark (if one applies) is exceeded.

Preparing this article has involved reviewing the prospectus for each of 10 New Zealand PIE retail funds where a performance fee is charged.  The 10 funds invest in either domestic or international equities.  While the FMA has issued a guidance note for performance fees charged by kiwisaver providers, the focus of this article is non-kiwisaver funds.   Let’s start by going through each of the key performance fee components in turn: