News
Performance fees pay off for Milford
Tuesday 23rd of July 2013
Milford Funds, a unit of Milford Asset Management, has reported a big jump in profit as a result of strong investment returns on increasing funds under management.
For the year ended March 31, Milford Funds had profit of $7.36 million, up from just $1.05 million a year early. Fee income increased 257% to just over $19 million.
Expenses increased to $8.82 million from $3.87 million a year earlier.
Managing director Anthony Quirk said the low base charge and a higher performance fee was something that was a good philosophical fit for the firm.
“We didn’t want to be a fund manager that just clipped the ticket even if the fund didn’t do well for clients.”
He said unit trusts of late last century generally did much better for the managers than they did for the clients, because of the fees charged.
Quirk said Milford wanted to offer a capped base fee that was low relative to standard management fees, but then charge a fee for good performance. Its base fee is 1.05%. “So if the client did well, we would do well. Clients responded well. Talking face-to-face, especially with sophisticated investors, they understood the problems with paying relatively high fees but not getting a good return. This way, they still get most of the upside but know if we don’t do well, we don’t earn so much.”
Milford was the fastest growing fund manager in New Zealand in the March quarter and Quirk said he expected the June data to be strong, too. There had been no pushback from investors in response to the increase in performance fees being collected by Milford, he said.
Its active growth fund was the biggest contributor to the increase in performance fee. It returned 25.3% after fees before tax in the year to March 31. Milford earns 15% of any return that it delivers for investors above the 10% target, after fees. Quirk said: “We effectively have to get 11% for the client before we share in any performance above that level. Some overseas hedge funds charge 2% plus 20%. We didn’t think that was fair.”
He said PIE funds offered an efficient structure that could be very beneficial for clients.
Comments (32)
Alison Gilbert
Milford's Active Growth fund returned 25.30% yet the NZX 50 returned 30%. So under performing the market earned them a big performance fee.......An investor would have been far better off just buying one of the NZX's own index funds. Same risk; better return.
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11 years ago
Craig Simpson
Ally
You are not comparing apples with apples with your comment above as the Active Growth Fund has bonds, cash and equities.
I disagree with your point about same risk and better return from NZX as I think you could find the Milford fund probably has a lower std dev.
You would have to calculate the risk adjusted returns to make a meaningful comparison.
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11 years ago
Brent Sheather
On the subject of “dumb” most regulatory authorities around the world reckon that investing in an equity managed fund with an absolute return or fixed interest benchmark is “dumb” …. so “dumb” in fact that it is my belief that they have made it illegal in the UK at least. Whilst Milford Active’s benchmark at 10% is almost reasonable investors would be better served if the UK practice of making benchmarks representative of the fund’s asset class was adopted locally. Unattractive performance fee arrangements just make index funds that much more compelling.
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11 years ago
Brent Sheather
Thanks for that but I feel more comfortable having half my funds in active managers and half in passive and must admit I am a Milford unit holder. Having said that I don’t for one minute expect the historic outperformance to continue and will be quite happy with Milford if, after fees, they can do as well as the index in the next 10 years. You are no doubt aware that many funds dramatically outperform in their early years but then level out relative to the index as FUM increases.
I don’t think any adviser should be suggesting to any prospective client that the dramatic outperformance of Milford’s early years is going to be repeated on a dramatically increased asset base so wonder about the relevance of your last comment. The biggest problem I have with actively managed funds is when they try to extract a high performance fee by misrepresenting their benchmark. There are lots of offenders in NZ and some are worse than others and some funds are worse than other funds. I can think of an income fund with a particularly odious performance benchmark.
Regards
Brent Sheather
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11 years ago
John Makowem
Since when have regulatory authorities been the benchmark for best practice ? To me that is "dumb." Lot of good they did when regulating the CDO/sub prime fiasco and in holding anyone accountable thereafter! Milford have done a great job and well done to them !
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11 years ago
Graeme Tee
Errr... excuse me Anon, past performance is not indicative of the future. But hang on a minute, you might need to back up that statement that the NZX has "returned less than nothing in real terms" with some facts and then adjust the Milford return to your version of "real" to make a valid comparison. Our data says SmartFoNZ returned 8.2% pa, less 2% for inflation = 6.6%. That by my calculation is more than nothing?
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11 years ago
Graeme Tee
PS that is 5 year data to 30 June 2013
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11 years ago
John Milner
Sorry guys but I'm with Brent. Lets see the outperformance over a reasonable time frame and with greater FUM. I can just see advisers throwing client funds into Milford on yesterday's returns without giving a thought to the wider picture of diversification, fees, clients needs, etc. I just can't reconcile giving a fund manager an incentive for taking more risk.
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11 years ago
Brent Sheather
Hi Anon
There is no denying Milford’s good performance and this is why we support their funds, in addition to the good work Brian does keeping market participants honest. And yes Milford could have made more money if they were benchmarked against the proper index. The point is however that they aren’t benchmarked against a proper index and there are numerous research papers supporting that view not to mention common sense. If you want to find an unfair hurdle then I suggest you look at various income funds offered locally.
On your last comment you don’t have to limit yourself to “10 boring ex growth companies” with ETF’s. There are lots of other alternatives, those 10 stocks you are talking about are probably priced to reflect their growth prospects and last but not least they are probably all in the Milford fund to some extent or another anyway.
Regards
Brent
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11 years ago
Graeme Tee
Yes Milford has hansomely beaten the NZX over 5.75 years, no question about that. However, we all know that Milford started with cash and the NZX was fully invested during the 2007-08 meltdown so perhaps your comparison is not so valid. It appears to me you are selectively using statistics to justify your strong opinion on active versus passive management in a discussion on performance fees. Obviously both approaches have merits and pitfalls and a sensible adviser would be mindful of both. If you want to play the small cap growth stocks for the excitement, you go for it. Lets hope you are not an AFA.
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11 years ago
Brent Sheather
I have always said that investors have a responsibility to own some active funds to keep the market efficient..whether they provide value or not. The av pension fund in the USA indexes half its equity portfolio..in a herald article of about 3 yrs ago I used the analogy between hitchhiking and indexing..if everyone thumbed a ride there would be no cars and hitching a ride wouldn't work. Its the same with indexing but incidentally there are good active mangers out there who charge 15-50 bpts. Rgds b
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11 years ago
Kevin Kevin
a) How much do you expect using active managers costs your clients? So the impact of fees minus expected pre-fee alpha?
b) How much improvement in market efficiency is provided by your policy as implemented by you?
c) What's the direct benefit to your client of b?
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11 years ago
Brent Sheather
I see it as acting responsibly..what's odd about that...why should my clients take the benefit of efficient markets without paying their fair share.
I'm happy to pay personally and let's be honest 15-50 basis points for active isn't excessive is it?
I criticise active managers when they make ridiculous claims, charge too much and extort excessive fees thru unfair performance benchmarks.
To answer kimble if my average active manager costs 40 basis points and alpha is zero then the number is 40bpts.
b.none but if everyone took that attitude markets would cease to function.
c.a good nights sleep maybe.
Rgds B
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11 years ago
Anthony Edmonds
I don't get your point Stan. I don't see how code standard 6 restricts Brent from picking funds that he thinks will underperform.
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11 years ago
Kevin Kevin
Wait, when you say that you are "happy to pay personally" do you mean that you pay the active managers out of your own pocket? Or were you just saying that you are happy to spend your clients money? I am sure you would have mentioned it already if you were the one paying the fees.
So your decision costs your client something, and gives them nothing in return? Do your clients KNOW that they are paying extra for nothing? Do they really UNDERSTAND the costs and benefits of your decision?
Your response is nonsensical. You claim that your clients are paying their "fair share" of the costs of keeping the market efficient, but then say that the amount they are paying doesn't improve market efficiency at all.
If what your clients are paying doesn't improve market efficiency at all, then their fair share of the costs is nothing.
Put another way, without your explicit decision to the contrary, markets would stay efficient AND your client would earn more money. You are turning a WIN-WIN situation into WIN-LOSE.
Put yet another way, all those other investors who are creating efficiency in the market through their (according to you) mistaken pursuit of alpha, are effectively donating value to your clients. You are taking that value, and then giving all of it, plus a massive amount more, to some lucky active managers.
And yet you say you sleep well at night.
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11 years ago
Brent Sheather
anon..Are you an AFA because if you are do you recall any of the theory on market timing...ie that it's very very very difficult.
I thought the whole point of active management, according to active managers anyway, was to pick stocks that will outperform. That's why active managers like Templeton stay more or less fully invested.
What this discussion does maybe highlight however is the woeful state of CPD in NZ.
By the way Vanguard research shows that active managers don't inevitably outperform in falling markets...some do but many don't and performance doesn't persist.
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11 years ago
Brent Sheather
Hi Kimble
A few things that you should consider :
1. The average US institution indexes half its equity exposure. We do the same, for the same reasons. One imagines that given the assets involved in the US “they really understand the costs and benefits of their decision”.
2. The average total fee paid by our clients in respect of an investment proposal including our monitoring fee but excluding initial fees is about 50 basis points. That doesn’t seem like we are “giving all of it, plus a massive amount more, to some lucky active managers”.
3. We manage $650m with 2.5 advisers, one of whom is responsible for research and are I’m so busy I’m not taking new clients. That sounds like the market sees our investment proposal as a “Win-Win situation” not a “Win-Lose” situation. If you are an AFA I would be interested to see comparable figures for your firm.
Regards
Brent
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11 years ago
Kevin Kevin
Brent, you haven't addressed a single one of my points. Merely making noise at a question is not the same as answering it.
1. When you simply appeal to authority (again) without saying one thing about WHY that authority has made the decisions they have or how their situation is similar to your clients, then you leave readers with no option but to assume that you either don't know their reasoning or that you don't care and are looking for post-hoc justification.
2. 40 bps for active, 20 bps for passive, zero gain from active, half the portfolio is active, 650m invested... hmmm. Back of the envelope reckoning puts that at $650k missing from investors portfolios on an annual basis ($650k less with which to fulfill their dreams and aspirations). How much is added to their portfolio due to their contribution to market efficiency? Nothing, as you admit. That's an expensive nights sleep.
3. So when I ask you whether your clients KNOW that they are paying money for nothing, you respond to tell us how much these potentially unaware investors have entrusted you with? Do your clients KNOW they are paying higher fees for nothing in return?
You constantly disparage other advisers for paying for active management, and claim that they do it for corrupt reasons. But you invest with active managers too. Oh, but you don't do it for the same reasons as those other stupid, corrupt guys, right? You do it to maintain the efficiency of the market.
So when you admit that market efficiency isn't improved one bit by your actions, you just leave people wondering, why are you really doing it? They could be forgiven for thinking your reasons might actually be the same as those people you disparage.
Your argument that 'if everyone invested 100% passive, markets would stop working' is laughably ridiculous. Consider how unlikely it is that everyone would change to investing in passive and how much your token effort (with clients money) would change things if they did.
Given that there is zero chance of everyone going passive AND that your donation to active managers has zero times zero chance of affecting anything AND that you don't think active management adds value, your stated reason for investing in active managers doesn't stack up.
I have little problem with having half your portfolio in active managers or your entire portfolio in passive. But your stated reason for doing so doesn't make any sense.
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11 years ago
Brent Sheather
Lots of interest here so here is a response. First off Kimble:
1. The rationale is that it represents best practice and by the way it’s quite novel being criticised for supporting active management for a change.
2. My guess is that the average management fees implicit in our plans are between one half and one sixth of that of competitors, so not really an expensive night’s sleep.
3. Clients are paying for market exposure they are not getting nothing and the fees they do pay are a lot cheaper than most other options. I disparage other advisers who make claims about active and passive management that aren’t true.
Stan – I have always said that you cannot expect most active managers to outperform. I have never said no one should invest in active management. I have been investing in active managers since about 1988. I’m interested in facts and when I see people saying things which aren’t true I’m motivated to set things straight. My experience that the supporters of active managers are more inclined to abstract reality than most other people.
Anon – if you are a successful market timer good for you. You are one of the few who get it right. My “education” is just repeating what most academics say and I have more confidence in academics than people “who have been in fund management for 27 years” but won’t reveal their real names.
Regards
Brent
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11 years ago
Kevin Kevin
1. You aren't doing everything US institutional investors are doing. How did you decide whether or not you would follow this one practice? You aren't being criticised for "supporting" active management. You are being questioned about your reasons for doing so because the one provided is patently absurd.
2. How much money needs to be spent on nothing before it becomes a waste?
3. I have been talking about the fee differential, not the total fee. There is a reasonable fee to pay for market exposure, and that's ETF rates. Your clients pay a premium for active management. The only reason you have given for them doing this, by your own admission, doesn't provide them with any value.
Your claim that your clients invest with active managers to 'keep the market efficient' is logically untrue. It doesn't, so they aren't.
So why do you really invest with active managers?
You seem to be twisting yourself into contortions to avoid saying that you invest in active managers to gain excess return.
Just admit it: you think that you can pick the active managers who will add value.
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11 years ago
Brent Sheather
Hi again Kimble
1. I tend to follow the big decisions of fund managers like asset allocation, duration, quality of bond portfolios, active/passive split etc overlaid by a consideration of fees and income.
2. Without giving too much away the active funds I use frequently give my clients management for free. I will leave you to think about that one.
3. My clients don’t pay a premium for active management. For example, AFI 15 basis points from memory versus SmartMOZZY … much higher. I have been using active managers for long enough to know that I can’t pick active managers who will add value.
But enough about me. Why don’t you tell everyone how you approach this issue, what fees your clients pay, how you allocate funds between active and passive etc.
Regards
Brent
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11 years ago
Kevin Kevin
1. Again you dodge the issue. Do you know why US institutional fund managers have half their portfolio in active management?
2. So now you are saying that active management ISN'T costing you more? What happened to 40bps?
3. AFI is invested in large cap stocks. SmartMOZY is invested in mid-caps. A fairer comparison would be the SPDR 200, or the Vanguard ETF.
If I was the one making assertions, then I would have to back them up. But lets say that I also had a 50/50 active/passive split.
Lets also say that I was questioned on why I used active funds when I was known for constantly claiming that other people who used active funds did so for the wrong reasons.
And finally, lets say I then told everyone that I only invested in active funds because peer group comparison was an important part of fund selection, and I wanted to ensure there were enough active funds against which to compare my preferred passive funds. Some European pension managers used active funds, the extra cost my clients were paying was just their fair share, they could sleep better at night because of it, and besides that they weren't paying more for it anyway so there.
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11 years ago
Brent Sheather
Hi
1. I think the reason US fund managers have half their portfolio in active is the same reason I do….. they need to ensure the markets stay efficient.
2. I’m not going to tell you and everyone else all my secrets! Maybe do some CPD and get enlightened. LOL.
3. Agree but AFI has lower fees than STW and frequently VAS.
On your last paragraph I completely agree with you.
Regards
Brent
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11 years ago
Graeme Tee
Anon, your criticism cannot go unanswered. What I'm on about is that when Milford started out in 2007 they didn't have a lot of funds to invest so it was easy to stay in cash and by it's nature the NZX Index was fully invested. As you say it wasn't hard to sit on cash amid the global turmoil. But you go on to say all smart fund managers sell up and hold cash just before a crash, this is absolute nonsense. All active managers can't sell at the same time you and i and every fund manager in NZ knows that the market is too small and illiquid to do that. To even cash up a small part of their portfolios would lead to a large slump in prices, especially in your small cap favourites. What I am saying is, if you are basing your expectation of Milford's future performance on their ability to go almost completely to cash again with $700m plus under management you are surely misguided.For Milford to do this would be an extreme speculation by them and I'm sure they don't do that. Finally this is not a criticism of Milford all I am saying is don't expect that situation again.
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11 years ago
alan clarke
The reason I gave up on active managers long ago was because the majority can't and don't get market timing right even 50% of the time - buying or selling. Plenty of research around to
prove that. And they cost plenty !
Milford have done well, but look when they started, and as FUM grows, watch returns decline.
Last years best fund, this years worst, or mediocre..........
Plus the Milford fund you are discussing is pretty much all NZ - if Wellington had had a tad bigger shake then how would an overweighted portfolio to NZ look this week?
Milford yesterday - great - but for tomorrow ???
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11 years ago
Kevin Kevin
1. You think? You don't know? What if their sole reason for indexing half their portfolio was to try and achieve alpha while reducing risk? Your decision to copy them would be an endorsement of that position. If you disagree with their reason then why copy them?
2. Your secret seems to be claiming that active management costs 40 bps (as you did in an earlier post) and then claiming that it doesn't cost anything (as you did in a later post). One doesn't need to gain enlightenment to point out when someone is contradicting themselves.
3. If those examples still confirmed your story, then we have to wonder why you chose one of the most expensive ETFs out there for your comparison. You can make anything appear cheap by comparing it to something completely different that is way more expensive. (What do you mean this car is priced too high, have you seen the prices of houses lately?)
4. Then we can assume you would also agree with:
a) investing in active funds to keep the fund manager section in the phone book filled.
b) investing in active funds to make your passive ones jealous.
c) investing in active funds because, you know, like, maybe in a future life you might come back as an active fund, man.
d) investing in active funds because they are really just passive funds that follow a private index replicating the fund managers opinion.
e) some of your clients money is getting a little too emotionally attached to some of their other money, and you want to put it into active funds to "give it some space". They're on a break.
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11 years ago
Graeme Tee
While this commentary has been sidetracked by a debate of active versus passive management ( not uncommon given the fervent support of active management by some un-named contributors) from the performance fee issue, City of London Investment Trust has announced it is removing the performance fee element from its management fee. The reason it says is the banning of advice commissions in the UK and their desire to create a more simple and transparent management fee arrangement. TCL's fee is now 36.5 bps (0.365%) for active management. I wonder how many NZ fund managers are thinking "that's a good idea"?
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11 years ago
Kevin Kevin
Bill, most managers stay 100% invested and leave it up to you to time going into and out of their funds. Active management means more than market timing, and doesn't have to include market timing either. Active management can be, and is most often, describing non-index security selection.
Graeme, perhaps you haven't been paying attention. The debate hasn't been active vs passive. The bulk of the debate has been about one person claiming to invest with active managers for patently ridiculous reasons and failing to defend doing so in the face of reasonable cross-examination. The rest has been dealing with the specifics of a particular active manager.
Perhaps you can point to the posts in fervent support of active management? Or are you just creating a strawman?
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11 years ago
Brent Sheather
Hi Anon – I think I would stay anonymous if I were you! Your point number 4 is completely wrong. In the three years ended 31 July 2013 City of London shares have returned 14.2% pa in NZ$ terms and in the same period, also in NZ$ terms, the UK stockmarket has returned 7.2% pa. The world stockmarket has returned 9.7% pa in the same period. So I don’t know where you get your data from, maybe it is from FundSource, LOL. And don’t say a word about it being in NZ$ because if it has outperformed in NZ$ terms, it has outperformed in GBP, Vietnamese Dong etc etc etc. You really should get your facts straight before making comments like this. It is a serious business!
I have owned this stock for at least fifteen years and note that it is on a premium. That suggests it is good! Regards Brent
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11 years ago
Brent Sheather
Hi Anon - An apology is probably in order here – mind you having the other investment trusts as a benchmark is a soft target but yes they have outperformed the stock market index so it is a big tick for active management. The way they have outperformed is by overweighting stocks like the tobacco companies and underweighting financials and mining. I think the reason they changed their benchmark from the FTSE index is because it is becoming dominated by dodgy Russian mining companies so a fairer comparison is probably with the MSCI World Index but even here their five year NAV performance is good at 5% pa versus 3.2% pa for the MSCI index. So a big tick for active management and a big tick for you. Regards Brent
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11 years ago
Anthony Edmonds
The City of London Fund looks like it is 92% invested in UK shares. Accordingly Brent I can't think that the MSCI World Index has any relevance, as the UK makes up less than 10% of this.
I see what you mean about there being money in things like smokes, as the City of London's biggest holding is British American Tobacco, with grog company Diageo also featuring prominently.
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11 years ago
Clayton Coplestone
A useful debate (albeit side-tracked) illustrating that different views & opinions "make a market".
On the active side: many (not all) quality active managers now announce their capacity on day 1, and stop accepting new business around that number.... retaining their investment dynamics in favour of their investors and not their shareholders. In my experience, those active managers that tend to prosper tend to have a "superstar" individual with unique talents, as opposed to the homogenous investment processes & philosophies marketed by large asset gathering entities.
Intermediaries are able to source this talent, albeit that any reliance on mainstream research will most likely mean that exposure is missed through "rating delays".
Bottom line: active management is alive & well, with some (certianly not all) investment talents continuing to deliver consistent robust returns in most market environments.
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11 years ago
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