Stock Takes: Performance fees skyrocket for fund managers

It has been a bumper financial year for fund managers, with strong inflows of money and solid market returns bolstering their fee revenue. As a result, their shareholders have enjoyed some record dividend payouts.

Fisher Funds Management – which saw its funds under management grow from $9.5 billion to $13.2b in the March 31 year – made a net profit of $49.8 million, up from $42.2m in the prior year.

Its fee income rose to $125.9m, up from $108m, driven by increases in both its management fees and performance fees.

Management fees, which are charged as a percentage of its funds under management, rose from $85m to $99m, while its performance fee income rose from $17.6m to $23.3m. Administration fees, however, dropped from $8.5m to $6.9m.

That saw the fund manager pay out $51.4m to its owners the Toi Foundation (formerly the TSB Community Trust) and TA Associates, up from $41.2m the previous year.

On top of that, Fisher Funds paid out an after-balance-date June quarter dividend of $16m.

NZ Funds Management also paid out an after-balance-date dividend of $23.2m to its shareholders.

Its ultimate shareholders include Gerald Siddall and Russell Tills, who jointly own 34.75 per cent; chief executive Michael Lang; director and former CEO Richard James, whose NZFM Capital partners owns 34.76 per cent; and NZ Funds Executive Trustees, which is owned by Harmos Horton Lusk lawyers Tim Mitchelson and Gregory Horton.

NZ Funds made a net profit of $36.5m for the March 31 year, up from $4.2m thanks largely to a big jump in its performance fee income, which rose from $2.8m to $57.2m.

Chief executive Lang said its results were achieved by delivering strong returns for clients. It has around $2.3b invested on behalf of 20,000 clients.

“The bulk of the returns were earned in growth funds which were benchmarked against local and international sharemarket indices.”

Lang said NZ Funds beat the global sharemarket both on the downside – by falling substantially less than the global market during the downturn – and then by rising significantly more during the rebound.

The fund manager came under fire this year for advertising a 107 per cent return on its KiwiSaver growth fund on billboards around the country.

Shortly afterwards, the Financial Markets Authority warned fund managers to avoid advertising large investment returns for the 12 months to March 31, 2021, as this could mislead investors because the period included none of the severe February and March 2020 Covid-19 sell-off, but all the following recovery.

Lang also noted that the performance fee NZ Funds received from its KiwiSaver assets of $670m, as of the end of the financial year, was 0.24 per cent.

While NZ Funds enjoyed a big jump in its performance fees, Milford Asset Management has so far earned the highest dollar amount in performance fees for its 2021 financial year: $68.2m, up from $21.2m. Then again, it also manages around $12b.

Devon Funds Management, which made a net profit of $7.6m, also saw a jump in its performance fees, which increased off a low base of $758,626 to $5.2m, most of which was attributable to its flagship Alpha fund.

Fees are also under the spotlight from the regulator, which in April told managers they had a year to justify how their fees represented value for money.

An FMA spokesman yesterday said: “The first round of Value for Money reports that fund managers will need to complete for their supervisor and then provide to us, should cover off exactly this question of how any performance fees are justified – both in terms of the amount of the fee and the thresholds/benchmarks that managers need to exceed to receive the fee.”

He said the guidance specifically covered performance fees and the questions it expects to be covered in the reviews.

“There are actions we expect managers to take if the value represented by performance fees is not clear – to reduce, or eliminate the fees or provide concrete additional value.”

Milford doubles down

Milford Asset Management will increase its private equity investment from $200m to around $400m after a recent third round of capital raising.

Brooke Bone, an investment director at Milford who co-manages the Milford Private Equity Fund II, said after four weeks it had already received commitments of close to $200mfor its third fund.

“We have invested nearly $200m and we have just finished raising our next fund which will be close to another $200m,” he told Stock Takes this week.

Bone said the main driver for the third fund was the ability to get access to companies and sectors that weren’t on offer through the public markets.

While the NZX50 has a high exposure to the utility sector and healthcare, it doesn’t include many companies that make up a large part of the New Zealand economy.

There are no large listed financial companies on the NZX and the agricultural and tourism sectors are also thinly represented.

Bone said its private equity funds had previously invested in high growth businesses in the IT, industrial and consumer discretionary space, which did not feature strongly on the NZX.

“Those sectors are likely to be growing at high single digits to low double digits. That is the story we are taking to our investors – if you want exposure to New Zealand, if want money to be working hard to build a better new Zealand, you need to get it out to this type of market.”

The fund will also invest more in Australian companies than its two previous private equity funds which had only invested in one Australian company.

The third fundraising was open only to wholesale investors but retail investors will get some exposure through Milford’s KiwiSaver Aggressive Fund, which will invest about 4 per cent of its money, or $20m-$25m, as a cornerstone investor in the fund.

Opening up

Milford has also recently reopened its flagship Active Growth Fund to investors after closing it off in 2013, saying it had reached its maximum size. It was around $620m at the time.

Bone said the fund was more oriented to global equities than it had been previously and therefore could handle the inflows again.

He said access to the fund was closed off to make sure it did not grow too big, which could weigh on returns. “Reopening it is a nod to the fact that bigger markets can handle those additional flows.”

Moving on

Two big names in the investment community are moving on to new jobs. Tristan Joll has left Salt Funds Management to join Jarden in a senior research sales role.

Joll was seen as a big hire when he joined Salt in mid-2019 as a senior analyst/assistant portfolio manager.

Matt Goodson, Salt managing director, said Joll did a great job. The company has found a replacement but is yet to announce who that is.

“We have still got very good team and a good senior person will be joining us in a couple of months’ time.”

Meanwhile, David Lane will move on to Aspiring Asset Management from UBS, joining other ex-UBS staffers at the asset manager.

Lane has been head of equities at UBS.

On the board front, Devon Funds Management has appointed June McCabe as a director.

McCabe had an extensive career in banking and finance before moving into governance. She also sits on the boards of Avanti Finance, Te Waka Pupuri Putea, Bells Produce, Taitokerau Investment Fund and Procare Charitable Foundation.

Cash rate impact

Salt’s Matt Goodson said his big worry at the moment was that monetary policy had been too loose. “Inflation pressures are everywhere.”

“We have seen that in the ANZ monthly business outlook survey and yesterday [Wednesday] it really came through in the household labour force survey.”

He said the bank economists were calling for three cash rate hikes before Christmas.

“But counter-intuitively, yield-sensitive stocks in New Zealand don’t seem to have noticed yet.”

Goodson said in the last few years investors had poured money into growth stocks and those with high yields as bank interest rates have dropped.

He said as rates rise, and particularly if they went up by 1per cent-plus in next 12 months, it would be fascinating to see how those stocks performed.

There had already been a shift back to cyclical companies, like transport and building materials, such as Mainfreight, Freightways and Fletcher Building this year.

“They are the companies with the pricing power to be able to overcome the cost pressures that are rampant everywhere.”

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