Performance fees traditionally linked to high-risk alternative investments are becoming more common with high conviction long-only funds, according to a Standard and Poor's (S&P) Australian equities report.
There are currently seven long-only managers charging performance fees: Platypus, BT, Challenger, Hunter Hall, MIR, Portfolio Partners and Prime Partners. Fees range from 15 to 20.5 basis points.
"When we looked at it in more detail the investment objectives of these funds ranged from 4 to 5 per cent above the benchmark, which we thought was appropriate against the benchmark, as it is a large amount of alpha," S&P fund analyst Marcus Hanel said.
"Higher fees, including performance fees, are acceptable if the investor is being compensated for the additional cost."
However, Hanel said if funds were going to charge a higher performance fee they needed to show a long and successful track record.
"If a manager fails to reach its performance objective, they should not be given a second chance until investors have recouped their losses," he said.
"I think this will come out in the wash over the next couple of years, I guess, but at the moment some of these managers are performing strongly."
He said advisers also needed to keep in mind that they could access good high conviction managers, such as Perpetual and Lazard, that did not charge performance fees.
"Fund managers have many alternatives when designing performance-based fee structures, and S&P feels that some fail to align investors' interests with their own," he said.
