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Asset-based fees: example 1

Asset-based fees: example 1. Assumptions Indexed Australian equities $100 million initial investment $10 million annual cash flow Asset-based fee 0.20% p.a. Fixed dollar fee indexed by AWOTE Comparison Total $ asset-based fees 80% higher than total fixed dollar fees.

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Asset-based fees: example 1

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  1. Asset-based fees: example 1 • Assumptions • Indexed Australian equities • $100 million initial investment • $10 million annual cash flow • Asset-based fee 0.20% p.a. • Fixed dollar fee indexed by AWOTE • Comparison • Total $ asset-based fees 80% higher than total fixed dollar fees

  2. Alternatives to asset-based fees Two commercial issues: • Would fund managers expect increased initial fees to compensate for loss of future revenue? • Would fees for smaller portfolios increase? Stepped scales Percentage of net cash flow (excluding dividends) Fixed dollar fee (with AWOTE indexation) Fixed dollar fee for life of contract

  3. Performance-based fees • Con • No demonstrable effects on performance • Encourages excessive risk-taking • Manager can get paid for “beta” instead of “alpha” • Complicated to administer and understand • Pro • Only pay for performance if it is delivered • Incentive for manager to manage (rather than accumulate FUM) • There is no alternative for some asset classes

  4. A better performance fee basis Risk-adjusted performance measure Low fixed-dollar base fee: Hurdle rate at least 50 bp Longer measurement period Fee cap

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