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Performance fees are a type of charge that a fund manager may take if the Fund's performance exceeds a certain level. In this article, we'll explain how performance fees work in the IISV fund.
Important: The information provided in this article is a simplified overview of how performance fees work in the IISV fund. We strongly recommend reading the Product Disclosure Statement (PDS) for the Fund before making any investment decisions. The PDS contains more detailed information about the Fund's fees and charges, as well as other important information about the Fund's investment strategy, risks, and performance history.
What are performance fees?
Performance fees are charges that a fund manager may take if a fund's performance exceeds a certain level.
For example, in the case of the IISV fund, the performance fee is 15% of any amount the Fund earns above a benchmark, which is the higher of either the S&P ASX 200 Accumulation Index or the RBA Cash Rate. We refer to these two benchmarks as 'Hurdles'.
In addition, the performance fee will only be charged if the Fund's performance is better than it was the last time a performance fee was charged. We refer to this as the 'high-water mark'.
So to be clear, if the Fund:
outperforms the ASX 200 Accumulation Index, and,
produces a positive return above the RBA cash rate, and,
exceeds its highwater mark from prior reporting periods
Then the performance fee is charged.
How is the performance fee calculated?
The calculation for the performance fee in the IISV fund is based on the Fund's "total return", which is the amount the Fund's value changes during a certain time period, adjusted for any income or capital distributions.
This time period is usually 12 months, ending on June 30 each year.
The "excess return" is the amount the Fund earns above the benchmark during the same time period, and the performance fee is 15% of that excess return.
The total performance fee charged to investors is based on the number of units they own in the Fund at the end of the time period, minus any "Equalisation Reserve" adjustments.
What is the Equalisation Reserve?
The "equalisation reserve" is like a fairness rule that ensures everyone who makes a positive return above the benchmark pays some performance fees while those who exit without performance don't have to pay performance fees when they leave the fund.
The Equalisation Reserve is a way to make sure that performance fees are only charged on the performance that is generated after an investor buys units in the Fund. Any new units created during the time period will be subject to an Equalisation Adjustment, and the total amount of Equalisation Adjustments made during the period cannot exceed the total number of units created during that period multiplied by the performance fee per unit.
What are the benchmarks for the IISV fund?
The benchmarks used for the IISV fund are the RBA Cash Rate and the ASX 200 Accumulation Index, which is a measure of how well the overall Australian stock market is performing.
The ASX 200 Accumulation Index is used as the index benchmark for the IISV fund because it has historically been one of the best-performing stock market indexes in the world. The IISV fund manager, Nathan Bell, believes that nobody should invest overseas unless they can beat the ASX.
This means that the IISV fund must achieve better returns than the higher return of the S&P ASX 200 Accumulation Index and the RBA Cash Rate.
How much will I pay in performance fees?
The performance fee will only be charged if the Fund's value is higher than the last time a performance fee was charged, and there is a cap on how much of an investor's return can be taken as a performance fee. The exact performance fee an investor pays will depend on the number of units they own, the price at which they acquired them, and the Fund's performance during the period.
Performance fees are accrued daily and are added to the unit price.
Suppose you decide to sell your units before the end of the calculation period. In that case, the unit price will already include the performance fee liability, just like management fees. However, the performance fee liability changes daily depending on the Fund's performance, unlike management fees which increase each day until they are paid.
Conclusion
Performance fees pay a fund manager extra money when they achieve better returns for their investors than a certain benchmark. If you have any questions about performance fees or the IISV fund, please don't hesitate to contact us.
Simplified Example:
Assuming the price per unit is $2.50 at the start of the year and $3.00 at the end of the year, the total return per unit for the year is:
$3.00 - $2.50 = $0.50 per unit
So, the total return for 800 units is:
800 x $0.50 = $400
Now, let's calculate the excess return over the benchmark. The benchmark for the IISV fund is the higher of either the S&P ASX 200 Accumulation Index or the RBA Cash Rate. Let's assume that the higher benchmark for the year is the ASX 200 Accumulation Index, which had a return of 10%.
The benchmark return for 800 units is:
$2.50 x 800 x 10% = $200
The excess return for the year is:
$400 - $200 = $200
Since the performance fee is 15%, the fee charged for the year would be:
$200 x 15% = $30
Which is $0.0375 per unit.
Note that this is just an example, and the actual performance fee charged may vary depending on the specific terms and conditions of the IISV fund.