Revisiting SA’s “Staggered” Performance Fees with OMBA’s Mark Perchtold

In this podcast, we revisit the SA performance fee scandal revealed a fortnight ago by Sean Peche, whose investigation showed big money managers rake in billions from savers despite mediocre returns. OMBA co-founder Mark Perchtold, who like Peche is a London-based South African, sheds light on a topic that has generated considerable debate – opening a new avenue of inquiry around access to investment platforms, which in South Africa belong to the oligopoly.

Perchtold on whether keeping costs as low as possible is becoming more important these days and SPIVA reports

Absolutely. I mean, I’ve been following some of the recent news you mentioned in South Africa. And that goes back many years in terms of my personal journey. But the use of ETFs in the construction of portfolios, as we have already discussed, and we actively use these ETFs. The reason we use these ETFs is because they are lower cost building blocks of, you know, a lot of multi-asset portfolios that historically have been built using actively managed funds or structured products or other solutions, which were often much more expensive. And there are various studies of active managers outperforming various benchmarks, but one very good one. I encourage your audience to research and Google these are the SPIVA reports that discuss the percentage of active managers that beat the benchmark net of fees over varying time periods. One-year, three-year, five-year Spiva report.

It’s a fantastic report that comes out every year. I think around the middle of the year and what it showed when I first saw it and it was about seven or eight years ago is that most of the industry doesn’t exceed not the net fee reference. So it’s better to just try to own the reference. So if your benchmark is the Footsie 100 or the S&P 500 or the Nikkei 2 to 5, why not just buy a budget tracker and you own the whole benchmark? If the odds are against you, in very many markets, 80% of managers were not beating the benchmark net of fees over longer periods, three, five and ten years. If that’s really the case, they just own the reference. So this allowed us to use ETFs as a tool to build our multi-asset portfolios.

On the invoicing of performance fees

Well, we don’t charge performance fees. Absolutely not. But performance fees have their place. You don’t have to cut them down completely. I think in many long and early strategies it is not necessarily fair to charge performance fees if they are charged. The investor really needs to understand the benchmark: what minimum rate is charged to him, these performance fees. But, in the world of hedge funds and private equity, for example, which I’m somewhat familiar with, there’s this old model of charging fees of two and 20, for example, one and ten and two is the annual fee permanent assets. And then the 20 is the performance fee, which is deducted additionally. And you know, those are pretty high fees when you think about returns that survey net of fees. if you generate a 100% return on top of your 100 invested, 20% off the top is a big number, that’s why we’re moving into the alternate space. you really have to think about passing it to the top quartile managers, because if you’re not in the top quartile, you’re better off. I’ve been at it for a long time – only for example when you compare it to private equity, but performance fees have their place. I wouldn’t knock them down completely, but in long strategies only, you know, if you’re long in fixed income or equities and there’s no complex underlying. The necessary instruments, let’s call them more qualified investment managers to understand and take advantage of the opportunities present in the market. And I don’t think performance fees should be charged. So having an inflation benchmark and charging a performance fee on top of that seems a bit unfair.

If he had a chance to read Sean Peche’s report and his thoughts on the points he raised

I think he makes great points. I think one of the challenges we’ve had is that it’s often quite difficult to get the data as an investor. So the different factsheets he would have used to perform the analysis, you would never know what class of stock you are looking at or you would know from the factsheet. But as an investor, you may not fall into this share class, especially if you use a platform or another channel. And often these big asset management companies have so many different classes of shares, there are institutional classes, performance fee classes, fixed fee classes and this class. And so it’s actually quite difficult to do the analysis. So I think Sean has given himself a very difficult task in trying to do that. But given the information he had, I think he showed some interesting points. And it’s crazy. the fact that performance fees have been charged in certain ways at least indicates that this is the case. And I’ll be interested to see how big companies will react if they do.

On performance fees in the retail sector not being charged in the UK and why SA has been so far behind the curve in this regard

Let’s be honest. Look, I think the industry will get away with it as best they can in any market. If you can charge it, you will. And I think that’s what the mentality of a lot of these companies has had is that if we can, if we can get away with charging more, we will. And so I think they’re finally catching up – well, now hopefully they’ll catch up in terms of moving the world. I mean, there was a lot of bad practice in the UK market and internationally before the RDR world in the UK for over 15 years now. But you know, industry practices have always come under scrutiny – possibly by someone in a market like South Africa, where you feel like there’s a bit more oligopoly . Maybe there’s a level of understanding between companies to say, well, that’s it, and if we’re all doing similar things, then at least we’re consistent in how we charge fees. But people don’t really have, because of exchange controls and everything else, a lot of experience in international and offshore investing, especially South African retail investors. And as a result, they are often unaware. What should I pay when they ask their local friend who’s with Allan Gray? One is with Coronation. One with Ninety One, one with Sanlam, one with Old Mutual. Choose your company and they all pay similar fees for their advice and for their products. Then I guess if your friends pay that fee and you pay the same, you say, well, that’s gotta be fine. Very few would have made the comparison to look off.

On the difficulty for small businesses to access platforms due to the fact that large companies own them

It’s so hard to get to platforms, you know, and Sean spoke about that when he talked about small shop managers. I mean, we felt the same in the UK market and in South Africa. The only way we can access a platform is by placing a large order from an investor using a platform. So it’s an IFA practice that uses the Allan Gray platform or the 91 platform or the platform, whatever it is. In South Africa someone has to place an order for your fund and it has to be size before the edge. So the smaller funds that, you know, are going to market what they do and don’t yet have thousands or hundreds of users or investors of those funds are struggling to access the platforms.

Now you can imagine the challenge one faces. Do you spend money on marketing, getting exposure on, say, the 1-2 of a big campaign and spreading his brand across South Africa to rival the strengths of brands like 91, Coronation, you know, Allan Gray. It would cost us a fortune. And now suppose we have investors who want to buy or invest in our fund through their financial advisor. The challenge. They couldn’t do it because they’re not on the platforms. So you spend the money first. Do you advertise or get on the platforms first and then spend the money so that someone can at least access you? And so it’s a bit of a chicken and an egg and that makes it very difficult for start-ups and smaller asset managers, where I actually think a lot of the skills have to be found because a lot of these deep seas move like slow ships. And so I think that’s a challenge that small craft businesses will face. And I don’t think it’s about to stop anytime soon.

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