Pie Funds is to drop its controversial performance fee model in favour of flat, all-in charges across its product range.
In a radical turn-of-foot, Pie will introduce single management fees for its suite of 10 funds as of April 1 next year rather than the complex array of performance fees currently in operation.
As of April 1, 2019, Pie will charge annual fees ranging from 0.7 per cent for the group’s conservative product to 1.85 per cent for the bulk of its growth-oriented funds.
Currently, most Pie funds attract base fees of 1.5 per cent while taking 15 per cent of benchmark outperformance. In practice, that has seen some Pie funds deliver annual fee levels of 4 per cent or more over the last year or so.
Mike Taylor, Pie chief, said the change was motivated by a desire to create a “transparent” client-centric business model.
“There’s been no one catalyst for change but it hasn’t always been easy to explain performance fees to clients – and many of them didn’t understand them,” Taylor said. “We’ve noticed that even more now we have an advice business.”
Pie launched a wealth management division earlier this year with two authorised financial advisers now working in the business.
Taylor said the manager had set the annual fees “as low as possible while still allowing us to be a profitable business”.
He said the base fee increase would help cover fixed costs such as compliance.
The $780 million Pie business reported a net profit after tax of almost $5 million over the 12 months to March 31 last year on revenue of about $14.3 million comprising performance and management fees of $8.3 million and $6 million, respectively.
Despite the success of the approach, Taylor said it was “dangerous” for managers to rely on performance fees.
Launched in 2007, Pie has built up a loyal following of mostly direct clients while delivering an “average annualised” after-fees return of 16.1 per cent, according to a Pie statement.
Taylor said if Pie sustained the same performance levels, clients would be almost 2 per cent better off each year under the new fee model.
But if the funds deliver negative returns in any one year investors would be 0.35 per cent worse off with the new flat fee approach, the Pie statement says.
He said Pie made the decision to drop performance fees after an internal review with no pressure from the regulator.
“No-one asked us to change the fees,” Taylor said.
However, he said the Financial Markets Authority noted it was a case of “a leopard changing its spots” when Pie informed the regulator of the move.
“It also removes another of the reasons people criticise us for,” Taylor said.
He said Pie is moving beyond its focus on small caps with an eight-strong investment team.