Small cap managers charging high performance fees, or taking large sector bets or stock specific risks, led research house van Eyk to recommend just six Australian small cap funds in its latest review.

Jerome Lander, acting head of fund manager research at van Eyk, criticised some of the high performance fees managers were charging. He said while managers tended to have a hurdle rate before those fees kicked in, it was a question of how appropriate that hurdle was. Generally small cap managers benchmark themselves against the Small Ords Index. Van Eyk prefers managers to only charge a performance fee if they are beating the benchmark by at least enough to clear their management fee. The managers charging performance fees were generally charging between 15-20 per cent. The research house initially looked at 22 small cap managers, but only 11 made it through the screening process, and just six went on to receive recommended ratings. The six recommended managers, who van Eyk did not want to publicly name, were awarded A ratings. No one attained AA status. The five managers who were not recommended were given B, or the newly introduced BB rating. Some managers who were downgraded had not performed any worse than the previous review, which was carried out in October 2004, but due to increased competition were not performing as well relative to their peers. Lander said small cap funds’ returns were likely to fluctuate in line with market conditions, rather than move based on managers’ skills.