Investment companies taking action on performance fees & dividends
Investment companies are responding to market demands by abolishing performance fees and focusing on paying regular dividends to meet investor demand for income, says the AIC’s Jemma Jackson
Investment company sector boards have been scrutinising their fees in recent months and on 26 January, JPMorgan Chinese followed many of its peers in announcing its intention to remove its performance fee from September 2015. This makes it the 26th investment company to abolish its performance fee since January 2013, compared to just a handful in the two years previous.
Just to underline that this is now a well-established trend, two days later we saw Pacific Assets Trust become the 27th company to abolish its performance fee, with effect from 1 February. Its management fee has increased to 0.90% pa of the company’s net assets, compared to a previous base fee of 0.75% (capped at 1.75% including the performance fee). Commenting on this change, analysts at Numis Securities wrote: “It is not uncommon for management groups to negotiate an increase in base fees to compensate for the removal of the performance fee. We estimate the impact of the change is to increase the combined base management fees from 0.94% to 1.05% pa of net assets. However, Pacific Assets has a strong performance record, delivering NAV total returns of 67.2% in the last three years versus 26.6% for the benchmark over the last three years, as a result performance fees have been significant in recent years.”
Also on the charges theme, the same week saw JPMorgan Russian Securities reduce its management fee to 1% pa of the company’s net assets, taking effect from 1st November 2014.
Of course, performance fees have a tendency to polarise views. Some argue that fund managers are rewarded handsomely for doing their job, so why should they earn a performance fee to do what they ought to be aiming for anyway? But the reality is less straightforward. Some investors prefer to pay a higher fee in good years and a lower one when performance is poor, and feel that performance fees can align the interests of the manager with shareholders, as well as secure top managers. Others might think it encourages excessive risk taking, but this shouldn’t be the case with sensibly set performance fees (although in some cases, ensuring that they achieve their intended purpose has resulted in increased complexity). The AIC is neutral on performance fees, but advisers do need to look at them carefully when choosing a fund and, in a post-RDR world, many investment company boards, particularly amongst the retail focused companies, are clearly moving away from performance fees.
Increase in regular dividend payments
Another well-established trend in the sector in recent times has been the quest for income, and I have commented previously on the impact this has had on the investment company sector in terms of demand. The average investment company discount closed 2014 at another record low of 2.5%, and many of the income focused companies have been regularly issuing new shares in an attempt to keep pace with demand. Indeed, 2015 had hardly started before one of the higher-yielding debt funds announced a £200m C Share issue, reflecting the current demand for these types of product (which has since grown to £250m).
It is also interesting to see that many investment company boards have been responding to shareholder demand for income by making their dividend payments more regular. Some 32% of conventional member investment companies (82 companies) are now paying a quarterly dividend to their investors, compared to 17% five years ago. So this has been a growing trend in recent years, illustrating investors’ appetite for regular income. There are also signs that more companies are moving to monthly dividend payments. At the beginning of 2014, only one investment company, F&C Commercial Property, paid a monthly dividend. There are now four: F&C Commercial Property, Forest Company and TwentyFour Select Monthly Income, with Fair Oaks Income announcing a move to monthly payments in January 2015.
As we move further into 2015, it’s good to see that shareholder value is clearly at the forefront of investment company boards’ minds. And I’d wager we will be seeing more examples of this in the coming months.
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