UK fund firm Hermes to allow fees clawback

Date: Friday, February 5, 2010
Author: Cecilia Valente, Reuters

* Performance fees to be paid over three years

* Instalments to be waived if fund underperforms

* Structure could become "landmark move"

LONDON, Feb 4 (Reuters) - Hermes Fund Managers will allow all its investors to claw back performance fees, the group told Reuters, in a move that could herald fundamental change in an industry battling client anger over excessive charges.

The UK firm -- owned by British Telecom's (BT.L) pension fund -- will roll out to its entire range the fee structure recently brought in at its hedge fund business as it aims to attract third-party mandates.

"We are not going to receive the performance fee in one lump sum. We receive a third only. Only if we meet or beat benchmark the following year, do we receive the next third and again for the following year," Chief Investment Officer Saker Nusseibeh said in an interview this week.

Hermes BPK Partners LLP, its fund of hedge funds shop, said last year that it would split annual performance fees into three chunks, to be held in escrow and paid over three years.

If the fund then underperforms in any given year, the instalment due for that period is forfeited, should clients choose to opt for this structure.

The decision to roll that out to the whole firm is a response to intense criticism from investors over performance fees in the wake of the financial crisis. Many were bitter about paying hefty fees on target-beating returns in the boom years while receiving nothing back when fund performance went south.

Some funds have sought to lower fees, or decided to move to a more performance-related structure, but this is the first time such a clawback system has been proposed across an entire range.

"This has the potential to be a landmark move. The wider impact will depend upon market reaction," said Jerome Melcer, partner at consultancy Lane Clark & Peacock.

"If Hermes picks up a number of new mandates on this basis, I can see some other managers looking at this very carefully."

RISK

However, he added that the new structure did not necessary eliminate wider fears about fund managers' short termist approach to risk.

"What happens if the fund reaches the last month of the year and performance so far is poor? Will the manager take on more risk to chase the performance fee?," Melcer said.

The fee structure could be implemented in two ways; for clients investing via individual mandates or directly into Hermes' existing funds and paying by invoice they will simply be asked for the instalments should they come due.

For BPK clients or investors in pooled funds with inclusive fees such as UCITS products, the performance fee instalments for the second and third years would placed in escrow and drawn down if performance targets are met.

At BPK, if a client redeems during the three-year period, the money for the non-performing period is returned, the spokesman said.

The fee structure is also part of a wider effort by Hermes to lure more third party business. The fund manager was set up in 1983 to manage the assets of the UK's largest pension fund, and currently has 21 billion pounds under management, mostly from the BT (BT.L) pension scheme.

Hermes wants to attract some 15 billion pounds from third parties over the next five years in an effort to bring the proportion of non-BT assets to as much as half from about 10 percent at present. On Wednesday it announced the launch of a credit boutique as part of that drive. [ID:nLDE6121M8]

The firm has been noteworthy for its shareholder activism through its Focus Funds and EOS advisory unit. Hermes is currently pressing for German chip-maker Infineon to oust its chairman designate and is opposing Canon's takeover of Dutch firm Oce NV's.