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Solaris Investment Management, the boutique created by Suncorp’s former Australian equities team, has taken the unusual step of offering investors a ‘performance fee only’ option for both of its funds. The Brisbane-based manager, which has amassed $1.1 billion since its January 2008 inception, has thus far charged retail investors a 90 bps management fee for its flagship Core Australian Equity Fund. However the separate performance-only class of units, which are set to have the Australian Wealth Management dealer group as an early adopter, will charge a base management fee of just 10 bps. It will then levy a performance fee of 30 per cent of any returns above its benchmark, the S&P/ASX200 Accumulation Index, subject to a high water mark with no re-set.

The managing director of Solaris, Denis Donohue, said the performance-only option was a reaction to investors demanding better value from their funds managers, as well as the boutique’s faith that its process can consistently outperform. “When you’re managing money for a big insurance company like we all did for many years, you are expected to return 300 bps over the benchmark year in and year out. We’re backing out bottom-up, empowered-analyst process to continue doing that,” he said.

Director of fund services at Standard & Poors, Paul O’Connor, hoped the move would increase competition in Australia’s “oversupplied” managed fund market. “I’m usually sceptical about performance fees; a few years ago we saw a lot of managers reduce their MER marginally and add a performance fee that was really asymmetric in their favour, but in Solaris’ case they’ve balanced it out with a very low MER – 10 bps would barely be enough for cost recovery,” O’Connor said. Solaris’ Donohue stressed that the viability of Solaris would not be affected in case of a year of underperformance, as the bulk of its FUM would remain on conventional fee arrangements.

He said institutional clients would be less likely to take up the ‘performance fee only’ option. “It works better in an environment where we are the only Aussie equity manager. If we are one of three or four managers and altogether you’re not getting much more than the beta return, you don’t want to be paying out a 30 per cent performance fee to us,” he said. However S&P’s O’Connor said Solaris may yet start a trend which sees true ‘performance fee only’ options become standard practice among Australian equity managers: “It’s a good time for Solaris to be launching theirs, given the market from here will inevitably bounce back at some point.”

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