Henderson technology investment trust manager Brian Ashford-Rus^_sell is
to get a slice of a 40m jackpot bonus thanks to performance fees.
He is not alone. Andrew Clarke and Michael Bourne, who run Finsbury
techno^_logy investment trust, are set to share a 14m bonus payout
following the success of their 200m fund.
Finsbury technology trust has turned an investment of 1,000 into 4,950 in
the last three years while the Hender^_son fund has returned 4,350.
The news is igniting the performance fees debate. But should it?
Investors in the funds pro^_bably do not give two hoots that the managers
are being rewarded for stunning performance figures. – in the same way that
most Manchester United fans do not give a damn if Roy Keane is being paid
50,000 a week as long as trophies keep filling the cabinets at Old Trafford
and despite his own goal last week in the European Champions League.
It would appear that analysts and IFAs also do not have a problem with
performance-related fees although many admit Ashford-Russell's exp^_ected
windfall is regarded as a little extravagant.
Henderson Investors will get about 7 per cent of the size of the fund,
which stands at 654m, with Ashford-Russell receiving a share of the figure.
The asset value is affected but the fee is deducted throughout the year so
shareholders are not hit with a big surprise.
Last year, the performance fee was 4.5m, of which Ashford-Russell received
There seems to be a “good luck to him” attitude. Most believe that
Ashford-Russell was fortunate to have negotiated his contract before the
technology story took off.
Simpsons IFA Andrew Mer^_ricks says: “I do not have too much of a problem
with it as long as managers are being rewarded for excellence and not
Whether investors like it or not, performance fees are going to become an
increasing feature of the investment trust industry, with more than 40
trusts rewarding managers in this way.
But trusts which reward managers with performance fees compensate
sharehol^_ders by reducing the management fee. Merrill Lynch ana^_lyst
Charles Cade says: “Some trusts, such as Scottish Ameri^_can and Finsbury
growth, also cut the management fee if the trust underperforms the
But one issue surrounding Henderson and Ashford-Rus^_sell concerns the
benchmark that is used to determine the bonus. The technology fund uses the
FT S&P World index as a benchmark. Cade says: “It is measured against a
general equity index and any tech^_nology manager would have outperformed
that last year.”
Henderson has hit back
at criticism, saying there was not a suitable
technology index such as the Techmark when the contract was drawn up. It
also says the situation is likely to be reviewed in the coming weeks. Head
of investment trusts Stephen Westwood says: “The contract was drawn up in
Dec^_ember 1997 when we were str^_uggling to get people to invest in
technology but the people we talked to agreed that the world index was
Analysts agree that Hen^_der^_son has a valid point bec^_ause shareholders
would have been made aware of the contract and would have agreed to it.
Warburg Dillon Read analyst John Szymanowski says: “At that time,
technology was not exactly the hottest sector – it was a dirty word. There
was not any technology index so they benchmarked against a world index. But
the question is what happens now because there are technology indices out
there with the Techmark and the Pacific index.”
As performance fees play an increasingly dominant role, boards and
shareholders will be scrutinising performance contracts in the future.
There are concerns that some fund managers who are underperforming as the
year comes to an end may take risks in a bid to beat the benchmark.
But Szymanowski says:
“It is human nature that fund managers go all
out to get performance fees but I am not sure they would inc^_rease the
risk towards the end of the year because it is human nat^_ure to want to
get them all year.”
It is a view shared by West^_wood. He says: “It is difficult to take
gambles with investment trusts. You are likely to get sacked by the board
it is a big risk for a manager
There are also fears that managers who have no chance of beating the
benchmark will “trash” the fund so they can
get further upside the
But analysts say such fears can be avoided by measuring performance over a
period of years and by setting a watermark before which fees can
If the fund size grew from 100m to 120m, the mana-
ger would get a fee.
If it fell to 110m, they would not and they would have to get above the
120m level again before the fee kicked in.
Cade says: “Fees need to be structured carefully and there are many
different ways of rewarding managers.
“Spr^_ea^_ding the fee over time neg^_ates the risk that managers may take
to beat the benchmark as the year comes to an end. You also need a
watermark so that a fund manager who und^_er^_per^_forms one year must
remake that performance bef^_ore they get a fee.”
The performance fees deb^_ate will go on but it will only be an issue if
bonuses spiral out of control. But if the fund is delivering the goods,
inv^_estors will not care too much.
Westwood says: “We have had more questions about the bonuses from the
press than shareholders.”