Thursday, October 6, 2022

Financial insider Peche drops ‘nuclear bomb’ on SA performance fee rip-off, names Allan Gray, Coronation, Ninety-One

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After his recent exposé on the massively underperforming but very expensive balanced fund unit trusts, Ranmore Funds founder Sean Peche has taken his attack on the financial services’ ripoff to a new level. The highly qualified asset management insider (CA, CFA) describes the results of his latest investigations into fact sheets and the SA unit trust fee structure as a ‘nuclear bomb’ compared with the balanced funds ‘scud missile’. He took BizNews’s Alec Hogg through a presentation where he lays out the shocking results uncovered by his research. It shows SA’s Big Three asset managers – Allan Gray, Coronation and Ninety One – are generating billions in unwarranted fees by playing fast and loose with self-serving benchmarks that deliver huge “performance fees” even when losing money for their investors.

Sean Peche on his investigations into fact sheets and the SA unit trust fee structure being a ‘nuclear bomb’ 

I fear it might be. And I just want to set the backdrop, you know, why am I doing this? Because there might be some people who say, ‘Well, this guy’s sitting over here in London throwing stones across the water. What’s he got to do with it? He’s causing chaos.” But it actually is very personal because after that last interview, I had friends and other family members contacting me, going, ‘Oh, goodness me, I think I’m in these things.” And so it’s personal. You know, friends and family are in these things. I’m not, thank goodness. 

And so I wanted to shine a light on this for everybody to make up their own minds. Now, this is going to unsettle some people, but the people who it unsettles are not worried about putting food on the table for the next month. And it’s not normal that a fund manager shows the fact sheets of other fund managers. I get that. But people need to understand and see it in the spirit in which it’s intended – which is to empower and enlighten South African retail investors. 

On the questions you need to ask yourself in terms of performance fees

Unfortunately, I got it wrong because it’s not a R320bn ripoff, in your words. It is more than a R600bn ripoff in performance fees. So, let’s kick in. The first point is performance fees are extremely complicated. The questions you need to ask yourself: are they absolute or are they relative, are they calculated on gross or net performance? What is the benchmark? Is it a common benchmark? Was it calculated behind the scenes, in the dark rooms of the fund manager? What’s the percentage sharing ratio? How often does the fee crystallise? Is there a high watermark? Does the high watermark reset? Do South African retail investors really understand all of this? 

On what a performance fee entails

Well, the idea of a performance fee is that if I perform well, you get most of the gains and I get a little bit to reward me for performing well. And what’s sold is that it aligns our interests, that wonderful word, align. And we have a thing called a sharing ratio which we talk about, nice, warm, fuzzy words. Okay. Unfortunately, it’s one way traffic. And I will show you that it’s one way traffic. 

One also needs to just reflect on the fact that some of the biggest hedge funds in the world are down 50% this year and they have massive performance fee structures. So the question is, ‘Are those not aligned?’ Because just because you are supposedly aligned with the portfolio manager doesn’t mean you’re not going to lose money. But the common perception is that we’re on the same side, we’re in this together and you get most of the spoils and I get a little bit.

On the cost of having your money managed in SA being three times more expensive than in the UK

I’m afraid it is. And look, bear in mind that a large number of these funds in the UK – the large funds – are trackers. I’ve been vehemently against many passive funds, as I’ve written about. With what you see unfold before your eyes today, you cannot blame investors for losing faith. Hopefully they don’t lose faith in all fund managers, but you cannot blame them. 

On why we’re in this position in respect of performance fees

We are in this position because the good times haven’t exposed the fee structure weakness. We’ve now got volatile markets showing you the flaws of these rolling high watermarks. Okay. People are playing fact sheet fiction. That’s what I call it. They’re showing the charts, they’re showing CPI, they’re showing all that nonsense. Let’s just show the truth. That’s what we want. 

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