Our offshore partner, Orbis, is improving its fee structure. We intend to implement these changes on 14 May 2020.
Highlights
- The changes will lead to lower fees in most circumstances.
- Over the long term, the new fees will only be more than the current fees if an Orbis fund outperforms its benchmark by 6% or more per year (before fees and assuming a performance fee refund is available).
- Orbis’ new fee structure will allow them to refund previously paid performance fees during periods of underperformance.
- The new fee will adjust quickly to performance experienced by clients.
Frequently asked questions
Here are some answers to frequently asked questions about Orbis’ new fee structure.
1. What will clients pay under the new fee structure?
Like traditional performance fees, the new fee structure will have a fee at benchmark (i.e. a base fee) and a performance fee component. However, unlike traditional performance fees, the performance fee component will be refundable. This simply allows Orbis to refund previously paid performance fees, thus lowering fees when clients are experiencing underperformance.
Key features of the new fees:
- Orbis’ fees will consist of a base fee and a performance fee component. The base fee will be 1.1% per year, which includes Allan Gray’s platform administration fee. For the performance fee component, Orbis will share in 25% of both out- and underperformance (known as the sharing rate). Performance fees will not be paid immediately to Orbis but will be available to be refunded during periods of underperformance, at the same rate of 25%. It will take at least three years for any performance fees to be paid fully to Orbis, if they are not needed to refund clients.
- The performance of each Orbis fund will be compared to the performance of its benchmark each week to determine whether Orbis has out- or underperformed. This measurement period will make the performance fee component adjust quickly to the performance experienced by clients.
- For the Allan Gray Offshore Platform, Orbis is providing clean-priced fee classes. The clean-priced base fee will be 0.8% per year and the maximum platform administration fee, which will be charged separately, will be 0.3% per year (excl. VAT).
We believe Orbis’ new fees represent a significant improvement in the fee structure and, with a performance fee refund available, will see lower fees in all scenarios, except where there is meaningful outperformance – when a fund outperforms its benchmark by 6% per year or more before fees.
2. Allan Gray and Orbis are known for keeping it simple, so why does the fee structure seem complicated?
The notion of a refundable performance fee and fee reserve is new to South African clients and may seem complicated, but the principle is simple: It ensures that performance fees are only levied if a fund generates sustained outperformance and Orbis can refund fees during periods of underperformance.
3. Will Orbis’ recent underperformance be accounted for in the new Orbis fees?
Yes, Orbis will fully account for recent underperformance when transitioning to their new fees. When making a change to a performance fee structure, it is important to make sure that the new fee accounts for a fund’s performance history. That is why there will be a transition period where clients will pay the current investment management fees until these fees have accounted for Orbis’ recent underperformance. This transition period will last until the average annual fee charged from the implementation date reaches the current fee for benchmark performance, or three years, whichever is earlier.
4. Is the new fee better for clients?
Yes. Over the long term, the average client will only pay more on the new fee structure if an Orbis fund outperforms its benchmark by 6% or more per year (before fees and assuming a performance fee refund is available). Looking at this historically, using the last five years of performance data for the Orbis Global Equity Fund as an example (as at 31 December 2019), the new fee would have been approximately 22% less than the current fee. Had the fund outperformed by 3% per year over this period, the reduction would have been 13%.
5. The base fee is lower but the performance fee sharing rate has been increased. What is a sharing rate and how does this work?
A sharing rate is the percentage at which a manager shares in the out- or underperformance of the fund relative to the benchmark.
The Orbis performance fee component is calculated by applying the sharing rate to the difference between the fund return, after the base fee has been deducted, and the benchmark return. The sharing rate is 25% of this difference, which applies to both out- and underperformance. The annualised sharing rate has been increased, however along with a reduced base fee, a shortened measurement period and a refund mechanism – the net result is a fee which is more reactive (importantly on both the upside and the downside), lower under most circumstances and more aligned to the performance clients experience overall.
6. How does the refund mechanism work?
Under other performance fee structures, when a performance fee is charged, it accrues to the manager immediately. Under Orbis’ refundable structure this is not the case. Instead, it flows into a fee reserve which is invested in the fund. This fee reserve is used to refund clients during times of underperformance, at the same 25% sharing rate.
As a simplified example, if the fund returns an annualised rate of 7% before fees and the benchmark returns 4%, the gross outperformance is 3%. After deducting the base fee of 1.1% per year, the outperformance is only 1.9%. A percentage sharing rate of 25% is then applied to this 1.9%. This results in the client paying a performance fee component of 0.475% per year, which is also added to the fee reserve. The client therefore pays a total fee of 1.575% per year, which includes Allan Gray’s platform administration fee.
If the fund underperforms by an annualised rate of 3% before any fees are charged, then after deducting the base fee the underperformance is 4.1%. A 25% sharing rate is again applied to -4.1%, which equates to a negative 1.025% per year. In scenarios where there are funds in the reserve, this negative performance fee of 1.025% per year is then refunded to the client from the fee reserve, which results in the total fee reducing to 0.075% (1.1% - 1.025%) per year. If there is no balance in the fee reserve, a running total of any underperformance is recorded and needs to be made back prior to any additional performance fees being levied.
7. What is the minimum and maximum fee that Orbis will charge?
There is no minimum fee, i.e. the total fees can be negative when performance fees are being refunded. If there are no performance fees available to be refunded, 1.1% per year is charged and any subsequent underperformance needs to be recovered before performance fees can be charged again.
There is no maximum fee. However, performance fees charged for outperformance can be refunded in the event of subsequent underperformance.
8. The measurement period has been substantially reduced. Why does a long-term manager have such a short measurement period? Will clients still be compensated for the underperformance?
The shorter measurement period makes the fee more reactive, which means that clients will pay fees for performance that they experience at that time. However, it is important to note that the shorter measurement period does not mean that Orbis will collect the fees more quickly. The performance fees are collected in a fee reserve which will be used to refund clients during periods of underperformance. In times of underperformance clients will be refunded from this fee reserve. If there are no performance fees available to be refunded, underperformance will need to be recovered before performance fees can be charged again.