Peche responds to Ninety One’s RoR: You can do better – eradicate performance fees 

It was inevitable that last week’s explosive exposé on asset managers with Sean Peche of Ranmore Funds was going to create waves. Alec Hogg’s interview with Peche unpacked a critical analysis of the fees that South African asset managers charge in spite of underperforming funds. Below Sean Peche responds to Ninety One’s right of reply.

Sean Peche’s detailed response to Ninety One’s right of reply:

Dear Ninety One,

Alec asked me to reply to each of your points which of course I’m happy to do.

Firstly, thank you for engaging so that we can achieve the desired objectives of increased transparency and fairness for South African retail investors.

1. Your reporting does not highlight that in Ninety One’s case all funds with a performance fee class also offer a fixed fee option. The conclusion that investors have no choice regarding the kind of fee structure they are subject to is misleading and untrue.

Firstly, I could not find anywhere on your website that explained the difference between the classes: A, E, G & H but I trust you will forgive me (and all retail investors) for thinking A class is the best class available – A team, A grade etc. It appears not.

I also note that the Opportunity “A” class July 22 fact sheet advises that fixed unit classes are available, but when  I visited “www.NinetyOne.com/feechanges” as requested, I received the message, “Page not found, oops….something went wrong”

2. Your reporting claims that 83% of assets in the unit trust industry which are non-income Funds are invested in performance fee classes, but this statement incorrectly assumes that all assets in a fund have performance fees. In fact, only 22% of the fund assets are invested in performance fee share classes.

I used the A classes or default fact sheet for each of the top 10 funds that any retail investor would see when visiting each fund manager’s website. Perhaps you could tell us where you get the 22% number from, because the fact sheets that I looked at only disclosed the fund AUM and not the class AUM. Had the Opportunity Fund A class fact sheet disclosed the class AUM as only being 22% of the fund AUM, I would certainly have questioned whether I’m in looking at the most desirable class.

But you raise an interesting point – wholesale investors are more sophisticated than the retail investors and you say they make up 78% of aum. 

So if the sophisticated investors don’t want performance fees, why is the industry selling them to unsuspecting retail investors ?

3. Your reporting implies that that the SA top ten funds have average total expense ratios (TERs) of 1.5% and that this reflects the experience of the average retail investor. This is misleading, as almost 90% of assets in SA unit trust funds are held via platforms and priced wholesale at significantly lower TERs.

I simply used the TERs off the default or A class fact sheets that reflects the cost any direct retail investor would experience.  I certainly did not encounter any disclosure of better wholesale pricing being available on any of the fund manager’s websites, nor that I could pay a lower fee by investing via a platform – is this still true after the platform fee? However, if as you suggest direct retail investors are paying higher fees than wholesale, then where is this disclosure and why are retail investors being prejudiced? This is certainly not how we treat investors in the Ranmore Global Equity Fund. 

4. Your reporting compares one-year performance with fact sheet TER.

This is misleading as TERs disclosed on fact sheets represent average TERs calculated daily over a three-year period. This was standardised across the industry via Association for Savings and Investment South Africa (ASISA) to avoid investors making decisions on shorter-term fees, which could be skewed by future over- or underperformance.

I take your point about the TER being a three year average, except I couldn’t see any disclosure to this effect on your Opportunity Fund factsheet. I’m sure you’ll also agree that the management fee and performance fee comprise the vast majority of the TER and that a one year TER doesn’t usually differ materially from the three year TER.

Please do also take the opportunity to explain how a 0.93% performance fee has been earned per annum for three years when the three year return for the Opportunity Fund to July ‘22 was  7.9% p/a and the benchmark was CPI + 6% so 10.8%. It would also be most helpful if you could also confirm that NinetyOne calculated performance fees on a Gross basis (before management fees) in sharp contrast to international norms (even for hedge funds) where Performance fees are calculated on the performance on a Net basis (after management fees) 

5. Your reporting failed to highlight that all funds that invest in equities, including tracker funds and Ranmore, collect fees when short-term returns are negative. These funds are not designed for short investment holding periods, hence implying that only performance fee classes collect fees during periods of negative performance is misleading and untrue.

I think every retail investor understands that management fees are charged all the time, even when short term returns are negative. What I think they most definitely do NOT understand, is why performance fees are charged when funds underperform the benchmark and even worse, when they underperform the benchmark and suffer negative absolute returns. If performance fees are charged in these circumstances internationally, ESMA requires a “prominent warning” to investors. 

You are also quite correct, these funds are not designed for, “short investment holding periods” but then please take the opportunity to explain to us all why the A class of the NinetyOne Opportunity Fund talks of “the daily performance fee…” In other words, why does the performance fee crystallise daily for a long term investment? Not even hedge funds crystallise performance fees daily. ESMA recommends the matching of performance fee crystallisation frequency with the recommended investor time horizon. That seems entirely reasonable to me but it seems NinetyOne disagrees so an explanation would be most helpful. 

6. Your reporting failed to accurately present fees on a like-for-like basis. You were often comparing wholesale fees with retail fees. If you were to accurately compare retail fees consistently across the funds you referenced in your reporting, you would not have concluded, as you did, that fund costs in the UK are dramatically lower than fund costs in South Africa. We highlight some further detail on a like-for-like comparison below:

  • In respect of UK fund fees, the Ninety One UK Alpha Fund A class ongoing charges figure (OCF) is 1.58%; Fundsmith Global Equity R Class OCF is 1.59% and Ranmore Global Equity Advisor OCF is 1.44%.  
  • In respect of SA fund fees, the TER for the Ninety One Equity Fund A class is 1.85% for the performance fee class and 1.75% for the G fixed fee class. In addition, your reporting did not account for the fact that SA funds include 15% VAT while the UK funds are VAT exempt.
  • Eight out of the ten largest funds in the UK are tracker and passive funds, with the ninth investing 90% of its assets in passives. These nine funds account for 82% of the assets of the top 10 funds in the UK. Therefore, posing a 0.5% TER as a like-for-like comparison for active fees in SA is illogical and misleading.

I do accept your point about UK funds being VAT exempt

I can’t have been comparing wholesale fees to retail fees because I don’t even know where to find these wholesale fees you talk of.

In my interview, I did specifically highlight the UK top 10 as including many trackers so I’m afraid I respectfully disagree here. You’ll also notice I talked of “less than 0.5%” I was being generous..

What I don’t understand and what you haven’t addressed, is how at tiny $60m fund like mine can have a lower TER than a R63bn giant like the NinetyOne opportunity fund with all the benefits of scale of the fund’s fixed costs. I estimate my TER falling below 1% at $200m and that’s only 5% of the size of the Opportunity Fund.

I stand by my point that investing in UK funds for UK investors is cheaper than investing in SA funds for SA investors and there really is no reason why this should be the case (other than high fees caused in part by performance fees)

You mention the Fundsmith R class but that’s a cross border, Non advised class. Fundsmith’s T class is for direct retail investors and that KIID reflects an “OCF” of 1.04% (nothing about wholesale)

You may know that I am no fan of passive funds, frequently referring to them in my writing as “driverless cars” and “who wants to be a passenger in a driverless car during a storm (and right now I think we’re in a storm)?”

So we’re on the same side of the fight against Passive funds BUT unfortunately comparing the fees for active funds to passive funds is the reality of the world in which we live. We must embrace reality.

As Active managers, our only hope of surviving is to offer something different and treat our clients, fairly and transparently.

Based on what I’ve seen, I think the South African Fund management industry needs to do better on both these counts.

So please join me and let’s eradicate performance fees, reflect fair benchmarks and radically improve disclosure. Our country needs that and our savers deserve it. If we don’t do so urgently, Passives will wipe us out. Far better you’ll agree, if this “storm“ wipes them out

While your reporting, conversation and analysis show deficits and inaccuracies, we trust, now that you are aware of the facts, you will adhere to professional standards of journalism and make the necessary rectification.

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