We believe that the price you pay an investment manager for managing your money should be aligned with the value they create for you over the long term. Saleem Sonday explains our view on investment management fees and why we believe that alignment is essential.
Next year, Allan Gray will mark 50 years of building long-term wealth for clients. Looking at the next five decades, we aim to continue to provide our clients with benchmark-beating long-term returns. If we succeed, then we would have done a great job for our clients for a century. This is no trivial goal.
Alignment is key to who we are
As a business focused on active investment management, building long-term wealth on behalf of our clients is our core focus. We do this through the consistent application of our investment philosophy and process. We take a contrarian approach, which means we often look different from our peers and the market. It can take time for our investment decisions to yield results, which can test clients’ patience; it is therefore important to us that our clients understand how we invest so that they remain invested long enough to enjoy the rewards when they come. If our funds do well, but only after clients have already disinvested, we have failed. Because our returns can look very different from the market, we believe that performance fees are appropriate for the way we operate. A fee that adjusts in response to performance creates an alignment of interests.
Alignment with clients is a key business principle and influences all aspects of how we operate.
Alignment with clients is a key business principle and influences all aspects of how we operate. Since our inception in 1973, we have subscribed to the idea that client outcomes are the number-one priority. This approach is critical to building and sustaining our clients’ confidence and trust. The business has been structured to make sure that we do well when we deliver on our goals and commitments to clients, and we feel the pain with clients when we do not. Senior decision-makers are not remunerated through short-term incentives, like bonuses, but primarily through longer-term incentive structures directly linked to the client value-add over time.
Fee levels should correlate with performance
In our view, clients should only ever pay an above-average fee when they have benefited from above-average performance, and they should pay less when performance fails to meet the required expectations. In essence, we are joined at the hip with our clients.
We constantly review our fee structures to ensure they remain fair and competitive.
Of course, all active managers aim to deliver outperformance, but we believe this focus is heightened when a performance fee is charged. Fixed fees, while simpler to understand, are earned regardless of whether a manager has delivered on their commitments.
Delivering value for money
In our view, a fair performance fee should reflect the value that an active fund manager has added for clients compared to a fair benchmark, and adjust appropriately during periods of under- and outperformance. We constantly review our fee structures to ensure they remain fair and competitive. Rather than aiming to be the cheapest in the market, we firmly believe that our fees should represent good value for money.
Actively adding value
As a proudly active manager, we perform investment research to come to our assessment of what we believe is the true worth of an asset. Any estimate of value tries to forecast the future profitability and growth of a company and is therefore inherently inaccurate, which is why we include a “margin of safety” in our estimates.
Investing with a margin of safety allows us to preserve clients’ capital while seeking long-term outperformance.
Every asset to be included or excluded from our portfolio is carefully considered in light of our findings. This is different from passive managers, who don't make active choices about what to own and aim to deliver results in line with the market return. Investing with a margin of safety allows us to preserve clients’ capital while seeking long-term outperformance.
Our approach links our success to our clients’ success: If we do not succeed for our clients, we think that they should vote with their feet. This view keeps our system on edge, but it also drives accountability and requires ongoing diligence on our part.
Our structure supports our philosophy and approach
We are privately owned into perpetuity. Our majority shareholder, Allan & Gill Gray Foundation, shares our long-term orientation and purpose – which enable us to stick to decisions we believe are in the long-term best interests of clients, and to withstand the short-term pressures often faced by listed entities.
Our founder, Allan Gray, believed that fees should encourage the firm and its personnel to act in the best interest of clients and to generate real, sustainable, long-term returns. Given that performance fees mean that investment managers are remunerated for what they deliver, a well-designed performance fee should lead to better outcomes and deliver what matters most to clients – long-term wealth creation.