There is such a thing as a good performance fee

In this series we have looked at how performance fees work, how the industry justifies using them and some questionable examples of performance fee structures.  This final commentary recognises features of some performance fees that have investors' interests in mind.  This is not an endorsement of any particular manager, their overall fee structure or the use of performance fees generally.  It is simply recognising examples of performance fee features that are positive for investors. 

Researching this article has involved reading non-KiwiSaver offer documents for 25 New Zealand-based fund managers (of which 19 charge performance fees in at least one fund) as well as offer documents for 10 KiwiSaver funds.

1. A performance fee cap
In 2012 the FMA issued KiwiSaver fund guidance encouraging managers to cap their performance fees.  In fact the FMA goes as far as to say they “expect to see an annual cap on the performance fee in almost all circumstances.”  Such caps can serve to limit the inequity of a cash benchmark used for growth assets and deliver more certainty to investors about potential fund costs.  

So how has the FMA’s encouragement played out in practice? A review of 10 KiwiSaver growth / aggressive fund investment statements revealed performance fees charged by three.  Of these three funds only Fisher Funds applies a performance fee cap (of 2%).