The funds management industry is closely following an unusual proposal by Pengana Capital Group to reset the clock on performance fees at high profile listed investment company, Hunter Hall Global Value.
Pengana is the investment manager of Hunter Hall Global Value, also known as HHV, as a result of its reverse takeover of the ethical investment house Hunter Hall International this year.
Shareholders of the $274 million listed investment company will be asked to vote on a proposal where HHV pays Pengana lower annual base fees, but in return Pengana gets to wipe the slate clean of HHV’s record of underperformance. If approved, that will have the effect of making Pengana eligible to earn performance fees from HHV sooner, and without having to claw back years of underperformance in a departure from industry convention.
It is one of a number of measures revealed earlier this week including raising new money through the issue of free options and explicitly targeting dividend growth.
Two separate unit trusts previously under the Hunter Hall umbrella won’t pay performance fees; both the $452 million Hunter Hall Value Growth Trust (VGT) and $81.6 million Global Equities Trust (GET) will have performance fees abolished entirely.
“While on the one hand an argument can be made that they’re changing the strategy, therefore it makes sense to reset the performance benchmark, the counterargument to that is resetting the performance fee high watermark basically means investors are going to be potentially disadvantaged given performance fees may be incurred earlier,” said Dugald Higgins, senior investment analyst at Zenith.
“At the end of the day, in a managed fund, performance fees come out of your unit price and if you’re in a LIC it comes out of profits,” Mr Higgins said. “In a LIC it’s a little bit more nuanced because you don’t directly get access to the returns generated by the investment portfolio, but at the end of the day it does impact the NTA” – net tangible asset value – “of a LIC and that’s what people are pricing.”
Mr Higgins said there was industry precedent for cases where incoming managers have elected not to reset performance fee high watermark.
“If the manager underperforms over the year, this has to be recovered before any further performance fees can be charged,” he explained of the high watermark concept.
Pengana co-founder and HHV director Russel Pillemer backed the strategy, saying it emerged from a consultative process.
“This was something which was pushed by the independent directors on the HHV board,” he said. The board this week confirmed Frank Gooch as its next chairman.
“They would like to see a lower base fee. At the same time, they would like the manager to be incentivised appropriately going forward and that was a win-win. It’s actually an outperformance fee so we need to outperform the benchmark to get it.”
The benchmark is the MSCI World Index and the performance fee is 15 per cent. The management fee drops to 1.2 per cent from 1.5 per cent.
“To reset the [performance] fee without changing the base fee would not have been fair,” Mr Pillemer said. “Consistent with other Pengana portfolios we’re trying to have good, stable returns with lower volatility and lower drawdowns. What Hunter Hall had was a portfolio that was quite concentrated and obviously was a highly volatile portfolio.” The ethical screen remains, he confirmed.
HHV’s biggest investor, Wilson Asset Management, told its shareholders in an e-mail earlier this week it is “currently reviewing” the proposal. “If VGT has removed its performance fee and the independent directors of HHV have not successfully negotiated the removal of the performance fee, as a shareholder I would be extremely disappointed,” Geoff Wilson said.