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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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