Nikko Asset Management NZ has ditched performance fees from its diversified funds citing better alignment with investors and new regulatory guidelines.
George Carter, Nikko NZ chief, said the move implemented at the beginning of July had seen all performance fees removed from underlying funds used in the group’s diversified strategies.
“I’m neither for nor against performance fees – if they’re structured well they can be good for investors,” Carter said. “But for investors in diversified funds the outcome could be sub-optimal if, for example, one underlying manager received a performance fee but the overall strategy underperformed.”
Previously, the Nikko balanced and growth funds were exposed to performance fees on a couple of underlying strategies – the wholesale Concentrated Equity and Option funds. The Nikko KiwiSaver scheme also invests into the manager’s balanced and growth funds.
Nikko investors would’ve have paid a performance fee of 10 per cent of returns above a ‘hurdle rate’ for the equities fund and 15 per cent for the options strategy: both subject to ‘high-watermark’ provisions.
While dropping the performance fees, Nikko slightly increased annual management fees for the balanced and growth funds by .04 per cent, leaving total estimated annual charges on par after the price reshuffle.
Carter said Nikko decided to remove the performance fees to create better “alignment” for retail investors but also on consideration of the Financial Markets Authority (FMA) tougher guidelines on performance fees.
“The FMA has made clear its preference is for funds not to have performance fees, particularly in KiwiSaver,” he said.
In its ‘value-for-money’ study published this April, the regulator noted a new annual fund review process to be implemented by all licensed managers next year “will also be simpler” for those without complex pricing structures such as performance fees.
Licensed managed investment schemes (MIS) will be encouraged to use a tool developed by the FMA along with industry in a pilot study this year to review funds according to value-for-money metrics at least once a year. However, the regulator has left the door open for managers to use other methods if they can show any alternative “achieves the same goal”, the FMA told industry in June.
“A fund not meeting one or more of the fees and performance criteria and/or with one or more of the specified fund features, does not mean the fund is regarded as poor value for money,” the April FMA report says. “It means the relevant MIS Manager must answer more questions in the tool – potentially including identifying sources of value other than performance and/or different measures of fund performance, supported by data – to better inform the value-for-money review by the MIS Manager, their Supervisor and, if necessary, the FMA.”