Fees and High Watermark
Summary of Fees
Management Fees. 0.50% p.a. (50 basis points) to actively manage your portfolio.
Performance-linked Fee. 15% on the portfolio's market-to-market P+L above the S&P 500 index (SPY) provided that we also beat the high watermark.
Morningstar: Recommendation for Structure of Asset Manager Fees
By linking our fees to our performance and aligning them to the following principles, we have structured our fees intelligently.
An article in Morningstar, “The ins and outs of performance fees”, by Morris, S. CFA* suggests asset managers should structure their fees in the following ways, and we agree!
Fulcrum In Nature. Performance fees should go up when Asset Managers outperform and go down in equal proportion when they underperform.
Low Base Management Fees. Base management fees should be set well below average to ensure asset managers don't earn high fees even if they underperform.
Appropriate Benchmark. Performance fees should reward asset managers if they outperformance over a benchmark that best represents their investible universe.
High-Watermarks. Performance fees should incorporate high watermarks.
We charge a fixed base management fee of 0.50% (50 basis points) p.a. to actively manage your US equity portfolio.
To illustrate, the base management fee on a $1,000,000 portfolio would total $5,000 over one year. This is calculated as $1,000,000 x 0.50%. A 2020 study into fees charged by Advisors found**:
Most investors with $250,000 to $1,000,000 in investable assets paid 1% (100 basis points) p.a. in fixed fees on assets under management, and
81.4% of investors with $250,000 in investable assets paid more than 1% (100 basis points) p.a. in fixed fees on assets under management.
Our performance-linked fees are designed to reward outperformance. We charge 15% each year of your portfolio's market-to-market P+L above the S&P 500 index (outperformance), provided that we also beat the high watermark on your account (the benchmark).
To illustrate, on a portfolio of $1,000,000, if we generate a market-to-market P+L of $10,000 over one year above the S&P 500 index, in addition to exceeding the portfolio's high watermark we charge a performance-linked fee of $1,500, calculated as $10,000 x 15%.
If we are unable to exceed the S&P 500 index benchmark and the high watermark on your portfolio, we do not charge a performance fee.
High Watermark In More Detail
The high watermark is the highest return your portfolio has achieved in comparison to the S&P 500 benchmark since the portfolio was launched.
A performance fee is only charged when your portfolio's accumulated total return in comparison to the benchmark reaches a new high. When this happens, the high watermark is reset at this level.
High watermarking keeps track of accumulated losses, based on the relative performance of your portfolio versus the broad market index, S&P 500, from prior periods. We cannot charge a performance fee if accumulated losses exist.
*Source: Veres, B., “2020 Inside Information Fee Report”, 2020, p. 27, date accessed 12/01/2020.
**Source: Morris, S. CFA, 2009, “The ins and outs of performance fees”, date accessed 03/05/2021, website: https://www.morningstar.co.uk /uk/news/64227/the ins and outs of performance fees.aspx.