Manager Research

Coronation make significant changes to the fees on their core fund range : Offshore funds

Following on from our previous note on the local fee changes announced by Coronation, we now look at the changes to the offshore funds affected and provide our opinion on the impact on clients. All the fees quoted below exclude VAT. We will look at each fund and the changes, but there are certain principles applied in the fees that are important to understand.

Performance fees and Fee discounts

The principle that Coronation appear to be following is that the higher risk funds with significant risk asset exposure will have performance fees applied, while the lower risk multi-asset funds will only have fixed fees. We think this is a sensible approach and aligns with client objectives

The performance fee is effectively structured with an additional fee charged for upside above a benchmark, and then a discount applied to the base fee if performance falls below a specific level. The structure provides a degree of symmetry in fee outcomes for clients but it needs to be clearly understood. Outperformance is tested over a 2 year rolling period while underperformance is over a 5 year rolling period. It is obviously less likely that an equity-centric fund will underperform over a rolling 5 year period than a rolling 2 year period. While the discount structure is welcomed and a 5 year holding period for an equity-centric fund is appropriate, it is inconsistent with the performance fees based on 2 years.

In isolation, each decision does make sense.

• Selecting 5 years for the discount period is consistent with the recommended minimum investment holding period.


• One of the limitations of a unit trust pricing mechanism is that every individual in a unit trust class is charged the same fee regardless of when they entered the fund – the fee is based on the fund performance as opposed to the individual's performance. This means that someone entering the fund after 2 years of outperformance will pay a performance fee without receiving the benefit of that outperformance. The longer the period chosen for performance fee calculations, the longer strong outperformance remains in the numbers, hence the shorter 2 year period being chosen.

However, investors do need to be aware of the inconsistency.

Level of base fees

The clean base fees charged by Coronation on their offshore funds are generally in line with what we see charged by most offshore managers – for example, we see fees for a Global Equity fund ranging from 0.60% up to 1% with the average probably around 0.75%. However, the vast majority of the offshore funds do not charge any performance fees. We do believe that Coronation should be able to charge a premium to the market average given their history of quality active management and their fees are lower than most locally managed offshore funds, but their TERs are higher than what we see globally.

1. Coronation Global Equity Select (USD and feeder fund)

Mandate and Benchmark changes: No changes

Fee changes:

• The annual management fee remains at 1.25% for retail (0.75% clean for USD fund, 0.85% for feeder)


• There are three changes to the performance fee structure:


• Performance will be compared over 24 months (as opposed to the current 12 months)


• The performance fee cap is reduced from 1.65% to 1.25%


• The fee is discounted to 0.90% for retail (0.40% for clean on the USD fund and 0.50% clean on the feeder) when the net of fees performance is below benchmark over rolling 5 years

2. Global Opportunities Equity (USD and feeder funds)

Mandate and Benchmark changes: Benchmark changes to ACWI as used elsewhere

Fee changes:

• The annual management fee remains at 1.35% for retail (0.85% clean for USD fund, 0.95% for feeder)


• The performance fee is removed

3. Global Emerging Markets (USD fund) and Global Emerging Markets Flexible (ZAR fund)

Mandate and Benchmark changes: There is a technical change to the benchmark – the benchmark will now be net of withholding tax. The change will make the benchmark easier to beat but it does makes sense as this is what an investor would achieve.

Fee changes:

• The annual management fee reduces from 1.35% to 1.25% for retail (0.85% to 0.75% for clean)


• For the ZAR fund, the retail fee is also 1.25% but the clean fee is 0.85% (reduced from 0.95%)


• There are three changes to the performance fee structure:


• Performance will be compared over 24 months (as opposed to the current 12 months)


• The performance fee cap is reduced from 1.65% to 1.25%


• The fee is discounted to 1.1% for retail (0.60% clean on USD fund, 0.70% clean on feeder) when the net of fees performance is below benchmark over rolling 5 years

4. Global Capital Plus

Mandate and Benchmark changes: Coronation are proposing a benchmark change for the houseview currency class and the feeder fund. The change is subject to ballot so will only apply on the houseview fund once investor approval is obtained (expected 1 October). The fund currently has a composite benchmark of 50% USD 3 month LIBOR & 50% 3 month EURiBOR + 1.5%. In simple terms the current benchmark is 1.5% above cash returns invested in 50% USD and 50% Euros. The proposed change is to move to 100% USD as the fund is denominated in USD.

Fee changes:

• The annual management fee increases from 1.35% to 1.50% for retail (0.85% to 1% for houseview clean, 0.95% to 1.1% for feeder)


• The performance fee is removed


• The discount applied for underperformance has changed in three ways:


• Discount is simplified to apply if performance is negative


• The period considered is now 24-months - previously it was rolling 12 months


• The discounted fee is now 0.85% compared to 0.75% on the old structure for retail. For the clean class, the discounted fee is increased from 0.25% to 0.35% for the Houseview currency and from 0.35% to 0.45% for the ZAR feeder

5. Global Managed (USD and feeder funds)

Mandate and Benchmark changes: The equity and bond components of the composite benchmark (60% equities/40% bonds) change. The equity benchmark changes from MSCI World to MSCI ACWI (discussed in the previous note on local fund changes) and the bond benchmark changes from the Citigroup World Government Bond Index to the Barclays Global Bond Aggregate (BGBA).

Fee changes:

• The annual management fee increases from 1.35% to 1.50% for retail (and 0.85% to 1% for clean on the USD fund and 0.95% up to 1.1% for the feeder)


• The performance fee is removed

6. Global Strategic USD Income (USD and feeder funds)

Mandate and Benchmark changes: No changes

Fee changes:

• The annual management fee reduces from 0.95% to 0.80% for retail (0.6% to 0.5% clean on USD fund, 0.65% to 0.55% for feeder)


• The fee discount (down to 0.50%) that applied on negative 12 month rolling performance is removed

7. Optimum Growth

Mandate and Benchmark changes: The benchmark has been changed from CPI+5% to a composite benchmark: 35% local equity (CAPI), 35% offshore equity (ACWI), 15% local bonds (ALBI) & 15% offshore bonds (BGBA)

Fee changes:

• The annual management fee remains at 1.0% for retail (0.6% for clean)


• There are three changes to the performance fee structure:


• The sharing rate is increased from 15% to 20%


• Performance will be compared over 24 months (as opposed to the current fund's financial year to date)


• The performance fee cap is reduced from 2.0% to 1.4%


• The fee is discounted to 0.85% for retail (0.45% clean) when the net of fees performance is below benchmark over rolling 5 years.