Cherry Reynard, Portfolio Adviser, 15 Mar 22:
A recent eye-popping payout for the managers of the Chrysalis Investment trust has revived a dormant debate on performance fees. Ostensibly a tool to align the fund manager’s interests with those of its clients, they have become increasingly controversial, with poor construction appearing to skew incentives. Yet around a quarter of investment trusts still charge them.
What does a ‘good’ performance fee look like?
The Chrysalis trust raked in £112m in performance fees as its net asset value rose 57%. The payout was even more controversial because the trust holds private companies. As such, the gains were based on revaluations from recent funding rounds, rather than on realised profits. Equally, the fees were calculated over a single year rather than reflecting cumulative gains over many years. Uncomfortably, the trust has seen a difficult start to 2022, caught in the crosshairs of the January sell-off.
This case highlights some of the shortcomings of performance fees. If the fees are charged over too short a period of time, there is a danger that a manager makes hay in one year, generates a big performance fee, but that fee is not clawed back if performance is weak in subsequent years.
Matthew Read, senior analyst at QuotedData says: “Earning a performance fee should not be like winning the lottery – you want your managers to be incentivised to outperform the following year, not thinking about early retirement.”
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