ASX LIC PERFORMANCE FEES L1 CAPITAL, THORNEY, WAM CAPITAL, VGI PARTNERS

A recent AFR article reminded me once again about how ASX LIC performance fees are a very nice deal for the fund managers. The article quite rightly posed questions about how they are free to choose whatever benchmark they like. Then why they sometimes are rewarded substantially when the shareholders go backwards, and why there is no standardised format to present what their performance numbers actually are.

In fact it, is due to the issue of ASX LICs choosing all sorts of variations in performance reporting methods that I wanted to explore some LICs in particular. Have they earnt performance fees way out of line with the results they have achieved?

The ASX LICs in the title are some names that have proved popular with investors at times. Issues such as strange benchmarks and reporting of performance numbers are often raised with these LICs.

When you read the performance figures of a LIC in announcements like monthly NTA reports, they are often designed by the fund manager to paint themselves in the best light.

I always like to visit the annual reports of LICs, or all companies for that matter. With that in mind, I was curious the amounts of performance fees that would show up, compared with how the manager had performed in the volatile period over the last couple of years. This might indicate some of the effects that “high water marks” and “strange” benchmarks or performance hurdles can have.

By the way here are some of the recent AFR articles that triggered my curiosity.

Fundies’ fee bonanza throws up many questions (afr.com)

Thorney’s questionable performance fees (afr.com)

Some of the ASX LIC managers that are covered here include L1 Long Short Fund Ltd (ASX:LSF), Thorney Opportunities Ltd (ASX:TOP), WAM Capital Limited (ASX:WAM) & VGI Partners Global Investments Ltd (ASX:VG1).

The main point here is to try and describe a bit more about how some of these performance fee structures work. That hopefully achieves more of a balance of information that an investor can find when searching on this topic. Without this, there are tons of other articles from promoting the IPO, to the manager’s own versions of performance reporting, to fund manager “puff” pieces that tell you everything you can imagine but conveniently are silent on performance fees, benchmarks, and high-water mark clauses etc.

Comparison of various ASX LIC performance fees

L1 Long Short Fund Ltd (ASX:LSF) Performance Fees review

  • L1 Capital gets 20% (plus GST) of the return of the portfolio.
  • If the return of the portfolio happens to have underperformed a common benchmark such as the ASX200 Accumulation index that doesn’t matter, a performance fee can still be generated.
  • They do measure portfolio returns (for performance fee calculation purposes) after the accrual of management fees.
  • There is some sort of “high water mark” feature.
  • The high water mark that kicks in is the portfolio value adjusted for the performance fee paid, that was set when the company last generated the performance fee.

My Comment on L1 Capital performance fees – Getting paid 20% on all positive returns is extremely generous. I suppose you could say at least they have to claw back any negative returns to start earning performance fees in the future again if that occurs. So they are not the worst out there (we shall get to that later).

It is interesting that this scenario actually kicked in because of the poor start as a LIC by LSF. This was one reason (along with a huge discount to NTA, and huge tax losses to utilize) why LSF was a far more investible proposition around 18 months ago. In May last year on the blog post here SHOULD I BUY ASX SHARES NOW? – Value Investing for a living I discussed how I was happy to keep holding LSF in part because they were well below their high water mark.

Their unlisted version of this product has generated fantastic returns even after allowing for a similarly high fee structure. I have had a good experience with this LIC so I might be a little bit biased sticking up for them. Having said that, today as I was writing this article, I did finish selling all my remaining shares. I think however I sold half the shares I owned in LSF around the 1.40-1.50 range mark though last year, and regularly the rest up until selling the last part of my original investment today. So if you still own LSF please take my decisions with a grain of salt. I think they might actually provide a stronger dividend policy soon (after all the directors are getting close soon to filling up their boots with shares again). Maybe that will provide another extra kicker to the share price after they have gotten set.

Whilst I have a lot of respect for their stock picking skills, the fee structure is a little too much for me to keep the conviction of holding LSF longer term. Over the last 18 months it has been a different story because it has regularly been at a large discount, not really the case now though. I know they have the runs on the board in achieving returns on a large base of AUMs despite charging high fees, I am just a bit skeptical it is sustainable longer term from here. I would be interested if readers have any other examples of fund managers with quite large AUMs but charging a 20% performance fee on any positive return, that keep delivering good results for their investors over the very long run?

Thorney Opportunities Ltd (ASX:TOP) Performance Fees review

  • Thorney Opportunities gets 20% of the positive return achieved of the portfolio.
  • If the return of the portfolio happens to have underperformed a common benchmark such as the ASX200 Accumulation index that doesn’t matter, a performance fee can still be generated.
  • They do measure portfolio returns (for performance fee calculation purposes) after the accrual of management fees.
  • No high watermark.

My Comment on Thorney Opportunities performance fees – No high watermark and no real benchmark to which the apply the 20% performance fee is worse than LSF above. Unfortunately for shareholders this combination delivered an extremely favorable outcome to the fund manager, and poor results to shareholders.

This was highlighted in one of those AFR articles I linked to above. TOP portfolio declined in 2020, but they enjoyed juicy performance fees just because the portfolio had a bounce from June 30 to December 31.

The strange performance fee methodology of allowing the performance fee hurdle to get reset every year was highlighted in this article also.

Peak to peak, which LIC managers performed during COVID? (firstlinks.com.au)

This publicity surrounds events over the last couple of years, how do they stack up longer term though? After all, with LSF I mentioned how they still manage to deliver alpha after fees to their investors. Is TOP also a case of the investors still getting above market performance even after the hefty fees?

Like many LICs, I wish you luck even finding their version of what the long-term performance numbers are. My experience usually as a rule of thumb is, if the LIC can spin a story that there might be some alpha, it will get displayed in some sort of form regularly to the market. Performance tables will be easy to locate.

Of course often investors can judge a manager harshly over a period where their style is not that fashionable, so maybe we should give TOP some more years before we judge?

I can’t help but think though that an investor is likely to get better returns if they simply try and take a copycat approach in replicating the TOP portfolio. Obviously this will be far from a perfect replication and you could do worse. However given the relatively infrequent turnover of the TOP approach, and the big head start you get from avoiding the massive fee drag, you would be in with a fighting chance of doing much better.

Perhaps there is an argument here that the fund manager has delivered plenty of alpha after hefty fees back in the older days of investing within private structures. Certainly there is plenty of articles online about a great reputation as an investor. This may well be the case and I actually like to follow closely what stocks Thorney are getting involved in. However there is not much transparency in terms of what the fund manager achieved in terms of the pre Thorney LIC days and what AUMs this was based on. I would want to have more of such information if I was going to be prepared to lock up my money with TOP for the long term.

WAM Capital Limited (ASX:WAM) Performance Fees review

  • WAM Capital gets 20% (plus GST) of the return of the portfolio that exceeds the All Ords Accumulation Index. This is paid annually, in arrears.
  • If the All Ords Accumulation Index has a negative year, WAM Capital gets the 20% (plus GST) on the amount the portfolio increased over the period.
  • If WAM Capital has a negative year a performance fee cannot be earned.
  • No need for them to claw back previous years of underperforming the benchmark.

My Comment on WAM Capital performance fees – The benchmark of the ASX All Ords Accumulation index is at least better than some others here that I discuss. However the absence of any sort of high watermark feature where they need to claw back previous underperformance is a problem. In theory a scenario exists where WAM Capital could achieve substantial underperformance to their benchmark in many consecutive years. Then they bounce back and have a mildly good year vs the index and straight away earn “performance” fees. For example, year 1, 2 & 3 say they underperform the index by a whopping 10% each year, say they grow the portfolio 2% every year but the All Ords is doing 12% a year. Then in year 4 WAM manage to grow the portfolio by 10% whilst the All Ords only does 5%. WAM would get a nice performance fee in year 4 despite being way behind the index cumulatively over such a period.

I have said for a long time the premium to NTA puts me off WAM Capital shares so I shall try and not go over old ground again there. I would also add though the performance fee structure is less than ideal.

To WAM’s credit though, historically they have justified to some extent the performance fees they have earned in my opinion. However “historically” is the key term here. It doesn’t get easier to outperform when your AUMs have increased faster than the market and you are managing a growing pile in the billions.

Despite my comments just above the WAM funds did do an impressive job over the last couple of years with performance, navigating the volatile period pre and post covid-19 well.

When looking back over the last decade, and taking away some of the performance leakage from base management fees, other costs and performance fees the alpha looks fairly marginal. Over the last 5 years would have been better to just own an index ETF. I get why some older shareholders who were there from day 1 of inception in 1999 might still stick around though. The sweet spot was in their first decade when they were small enough to play around and be nimble in small / microcaps.

As an aside, I thought their latest LIC in WAM Strategic Value Ltd (ASX:WAR), said a lot about how they set their performance fees at times. In that case they followed the approach used by L1 Long Short Fund Ltd (ASX:LSF). I discussed this in a recent blog post on a review of WAM Strategic Value Ltd (ASX:WAR) here WHICH LICs WILL WAM GO TO WAR ON? WAM STRATEGIC VALUE REVIEW (ASX:WAR) – Value Investing for a living.

VGI Partners Global Investments Ltd (ASX:VG1) Performance Fees review

  • VGI Partners Global gets 15% (plus GST) of the return of the portfolio.
  • If the return of the portfolio happens to have underperformed a common benchmark such as the ASX200 Accumulation index that doesn’t matter, a performance fee can still be generated.
  • They do measure portfolio returns (for performance fee calculation purposes) after the accrual of management fees.
  • There is some sort of “high water mark” feature.
  • The high water mark that kicks in is the portfolio value adjusted for the performance fee paid, that was set when the company last generated the performance fee.

My Comment on VGI Partners Global Investments performance fees – A similar structure here to what was noted with LSF above, although not as bad in this case where the performance fee is 15% as opposed to 20%.

Still extremely high by industry standards in the context of being charged on any positive portfolio returns, irrespective of what common global equity indices might deliver.

The manager here has a strong record after fees going by their published unlisted fund’s performance tables going back some 12 years or so.

Perhaps this can be another case like LSF, where the manager just had a lean run for while after its LIC IPO? Are we seeing managers like this having a flat spot in part because they are taking on much larger AUMs aggressively raising capital, and does this prove to be a distraction to their stock picking focus?

I have never owned VG1 myself, but it wouldn’t surprise me if they eventually close the discount to NTA. Activists have applied some pressure and the board has at least followed through with some initiatives. These include a serious share buyback, strong dividend intentions, efforts on shareholder communications, and they have a performance fee reinvestment scheme.

Performance fee reinvestment mechanism for ASX LICs

Some of these ASX LICs now have programs where they are forced to reinvest the performance fee income earned by buying shares on market, so long as they are trading below NTA. If the shares happen to be above NTA they instead would not buy on market, but rather reinvest the performance fee income via the LIC issuing new shares at NTA.

I just thought I would highlight this as it is becoming more common and might be a type of short term “special situation” trade. For example, I note with interest that LSF recently saw a discount of I think above 6% again to after tax NTA. Yet it feels like once this recent performance fee income reinvestment buying has hit the market this has been the catalyst to close this discount. It might be worth watching other LICs for this effect.

L1 Long Short Fund Ltd (ASX:LSF) and VGI Partners Global Investments Ltd (ASX:VG1)  have these types of schemes, and Sandon Capital investments Ltd (ASX:SNC) recently announced something similar. There is a new LIC IPO coming to the market in the next few weeks from Lanyon Investment Company Limited (ASX:LAN), who are also doing something similar with performance fee reinvestment. From my understanding Lanyon also plan to reinvest their monthly base management fees by buying their stock if it is below NTA, as well as doing the same with any performance fees they may earn.

Are ASX LIC performance fees worth it?

Let me know in the comments if you think all of these LICs above can clearly beat the market after fees well into the future? It provides a bit of food for thought for those investors that are big fans of some of these fund’s stock picking skills in the context of Future Generation Investments (no performance fees). Future Generation includes nearly all these fund manager names above amongst the managers they use.

13 thoughts on “ASX LIC PERFORMANCE FEES L1 CAPITAL, THORNEY, WAM CAPITAL, VGI PARTNERS”

  1. Thanks Steve – I’m interested in your view that an investor would have been better off holding an index ETF than WAM over the last 5 years. Wilson would say that the LIC structure is giving you growing franked dividends which are better suited to an SMSF in retirement phase – his target market. Factoring in franking and a zero-tax environment, would you still say the ETF would have been a better performer? I guess you’d have to allow for selling down a portion of the ETF holding each year to match the same dividend from the LIC. I’m not trying to defend Wilson, all of these fees discussed are excessive and wrong. It’s something that I do wonder about (a comparison of the return from WMI, WLE & WGB compared to index ETFs in a retirement phase SMSF – leaving the WAM LIC out of it due to the crazy NTA premium). Cheers.

    1. Hi noddy,
      You raise some good points. I should clarify that perhaps a word “maybe” should have appeared with my statement of the last 5 years, because I didn’t drill down with the analysis to take into account some of the things you mentioned.
      I simply was referring to the WAM performance tables in their annual report to June 30, 2021. I was also therefore disregarding moves we may have seen in the premium to NTA. (I thought from memory the premium would be at similar levels to mid-2016 now anyway?). They have themselves outperforming the All Ords Accumulation index by 0.4% annualized on a pre fees, expenses, taxes basis. I then thought it would be conservatively fair to say that if you deduct a mix of the effects of base management fees, performance fees and other expenses, you need to take off over 1.5% annualized. An ETF you might have to shave off 10bps. This might mean overall WAM is under the benchmark by about 1% a year in this 5 year period as a loose starting point to the discussion?
      If those assumptions are close to the mark, I was thinking that is quite a bit to be lagging, and that factors you brought up would not compensate. It only briefly crossed my mind though with extra franking between WAM v ETF and depending on your tax environment etc. Therefore perhaps it is not so clear cut. Interested in your thoughts?
      It is a good exercise to think through though. As you say for WMI, WLE, WGB it would also be a good thought process. I don’t think personally WAM has been in a buy range for the last 5 years but occasionally WMI, WLE, WGB did throw up some buying opportunities over the last 5 years.
      Cheers
      Steve.

  2. Nice article Steve. I can’t justify buying an international LIC charging performance fees with no high water mark and a decent bench mark. Don’t fancy paying for someone else’s yacht.

      1. Spot on Eddie! Perhaps there are investment implications to consider, are there stocks out there that will benefit from the urgent need to boost the supply of yachts to cater for this demand surge?

  3. I totally agree with your comments on WAM, LSF & TOP their fee’s are crazy high but I have found that for our five yrs with AFIC have out performed VAS & STW by a reasonable margin & their MER are very similar.

    1. Yes AFIC have done quite a respectable job with the portfolio over the last 5 years. Also if you measure it via total shareholder returns, with the premium to NTA growing a fair bit (which I mistakenly did not expect would happen), the returns look even better the last 5 year period.

  4. Thanks for the analysis Steve.

    My feeling is that any structure without a high water mark is likely to underperform the market for its investors.
    An index fund is much better for investors on a probability of success basis.

    The 2 mentioned with high water marks do take a pretty massive cut at 20% and 15%. So you’d want them to be exceptional managers and buy in when they have dropped way below the high water mark. At close to NTA, LSF is making me think twice about holding, but certainly respect their track record and well argued thesis in their reporting.

    1. Yeah I found it a tricky call because “growth” has come back again doing better than “value” the last few months. If this reverses to favour value again then LSF might have another good period. I think where I sold at this morning might have been in line with after tax NTA (which could come back to 2.70 with recent ex div and market weakness after Sep 8th). One thing I found interesting is L1 Capital recently launched an unlisted concentrated long only activist type fund. With that there appears to be a more appropriate benchmark, high water mark etc.

  5. Yes sadly too many LIC managers appear to have their own interest ahead of their investors. After several years of negligible capital raising the sector was finally starting to recover and NTA discounts coming back, but already I see increasing options issuance and IPO’s cropping up again, so the sector may be on the nose again soon if we are going back in this direction. The FUM data is clear that ETFs have won the race and LIC’s will become more and more boutique/niche over time as advisers and large clients will steer clear of these high cost, less transparent vehicles. Investors in steep premium LIC’s like WAM and WAX hopefully aren’t assuming the premium is a given indefinitely. It may stay for some time yet but surely there will come a day when common sense prevails. It’s ironic as Geoff himself is repeatedly saying buy discounted LIC’s, not the ones at crazy premiums…

    1. Yes I think you have hit the nail on the head with where the sector is going. It has been harder the last couple of years to get a new LIC IPO going, so this plus all the wind ups, takeovers and conversions have kept a lid on supply. Hence a sweet spot for discounts to contract in the last year. Established LICs will now be working hard on keeping a flood of new supply by expanding the share count with options, rights, SPPs. Some recent ones going down this path WGB, FGX, SNC, PGF, TEK, there are probably currently others and expect more going forward.

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