Al­lan Gray Eq­uity Fund adds off­shore ex­po­sure

Finweek English Edition - - INSIDE -

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.


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.


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.


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.

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