Allan Gray Equity Fund adds offshore exposure
Since inception in 1998, the Allan Gray Equity Fund has returned 26% a year (after fees), while its benchmark, the All Share Index (Alsi) has returned 18.5% a year. Following a successful ballot, the fund has changed its mandate with the aim of increasing long-term returns by adding offshore investment opportunities and reducing fees.
WHY THE CHANGES?
The fund’s history has coincided with a 16-year period of fantastic returns on the JSE (see graph). After such a strong period, Allan Gray expects the South African market to deliver lower returns in future. Previously, the fund was limited to investing only in shares available on the JSE. “Allowing the fund to invest offshore gives it access to a broader range of global shares, allowing our portfolio managers to do a better job for clients,” says Richard Carter, head of product development at Allan Gray.
To this end, the fund’s investment mandate has been changed in line with the limits of the fund’s sector, general South African equities. This is limited to 25% offshore, with a further 5% for Africa ex-SA investments. “This doesn’t mean, however, that our portfolio managers will suddenly devote their time to global stock picking. Instead they will actively allocate a percentage to be invested offshore based on their view of the attractiveness of global shares compared with JSE shares,” says Carter. This allocation will then be invested in funds managed by Allan Gray’s offshore partner Orbis.
A NEW BENCHMARK
As the fund can now invest offshore, its previous Alsi benchmark is no longer appropriate. Its new benchmark is a sector average benchmark, based on the market value-weighted average return of SA’s general equity sector, excluding Allan Gray funds.
To outperform the new benchmark Allan Gray will have to generate better returns after fees for investors than would be available to them from its competitors. “We feel this is fair, especially as the market value weighting places a greater emphasis on the bigger funds in the sector, which tend to have grown through consistently good returns and resulting client support,” says Carter.
A LOWER FEE FOR BENCHMARK PERFORMANCE
Allan Gray will now charge a new investment management fee, aiming to reduce the cost of investing in the fund and better align the fees clients pay with the performance they experience. “We believe that performance fees are a good thing: they can ensure that investors only pay above-average fees when they experience above-average performance. This aligns the interests of investors with those of the fund manager.”
The fund’s previous two-year rolling period fee design and the wide fee range of 0%-3% meant that there could be a meaningful timing mismatch for investors joining or leaving the fund. “If you joined the fund after a period of outperformance you would have paid for it over the next two years even if you did not experience the same level of outperformance over that two-year period,” says Carter.
The fee for benchmark performance has been reduced from 1.5% to 1% and the performance fee calculation period has been changed from two years to a daily fee. This means investors will never pay for outperformance they haven’t experienced. The fee can reduce to zero when the fund underperforms the benchmark. While there is no explicit cap, the fee is limited by the extent to which the Fund outperforms other equity funds.
The fee (before VAT) is now calculated daily by comparing the fund’s daily afterfee performance to the performance of the benchmark. If the fund’s performance is equal to the performance of the benchmark t hen t he fee will be an annualised rate of 1%. If the fund outperforms or underperforms the benchmark then Allan Gray will share in 20% of that out or underperformance.
This means that for each percentage of annualised outperformance t he annualised fee rate will increase by 0.2% and, for each percentage of annualised underperformance, the annualised fee rate will decrease by 0.2%. For example, 1% annualised outperformance will result in an annualised fee rate of 1.2%, while 1% annualised underperformance will result in an annualised fee rate of 0.8%. A high watermark principle applies.