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Cup runneth over for managers

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&#39s 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

mediocre performance.”

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
to take.”

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

following year.

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.”


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