WHEN PERFORMANCE FEES PUNISH

Six nasty hidden pitfalls that hammer your investments

- JACKIE CAMERON

PERFORMANCE FEES are becoming an increasingly popular method of charging among asset managers—but there are nasty hidden pitfalls in calculations that can cost investors dearly.

A growing number of asset management companies are turning to performance fees as an alternative to fees as a percentage of assets under management. The latter can be a lucrative and easy way for investment professionals to make loads of money for doing very little to outpace the market.

While 2% of an investment may seem like a small figure to pay for the services of a financial expert with a string of degrees behind their name, it becomes particularly sumptuous as the amount of assets under management increases.

As an example: a 2% fee on R1 million is R20 000, while a 2% fee on R10 million is R200 000. The fee becomes bigger and bigger as assets under management grow, although the percentage stays the same. Paul Stewart, deputy managing director of Plexus Asset Management, says that generally the amount of work doesn’t increase proportionately along with the size of assets under management.

Fixed costs can become a pricey way of paying for asset management if you have a large sum available for investment. They can encourage an asset manager to become an ‘asset gatherer’ rather than concentrating on investment performance.

That said, there is some incentive for the asset manager to perform even if they are an asset gatherer, because better performance bolsters the size of a portfolio and attracts more cash for management—but many believe there is an even better way to squeeze extra performance out of an asset manager: through performance fees.