As asset managers increasingly focus on growing assets under management rather than delivering superior investment performance they continue to let investors down on fees, according to Orbis Investments’ Dan Brocklebank.
Brocklebank (pictured), Orbis’ UK director, said investors should only pay when their managers deliver market-beating returns and that better fee structures are needed to align managers’ interests with investors. 
He said: “Research studies have looked at the difference between the returns that an average investment fund generates and the returns that investors actually get as a result.
“The difference is 5 per cent per annum on average – a mind-blowing number when you think about it.”
The Orbis director added: “Imagine that the market as a whole does 8 per cent, the average fund does a little bit less - because they charge fees - so let’s say 7.5 per cent.
“After that 5 per cent, the average investor is just getting 2.5 per cent per year.”
For Brocklebank, the 5 per cent gap between the returns made by the average investment fund and the actual return obtained by investors is partly due to human nature.
He said, people tend to follow the crowds and “invest in what is comfortable” or in funds that “charge set fees regardless of performance”.
“As humans, we look for the comfort of the crowd, we feel comfortable when we are surrounded by people who have the same outlook on life, who like the same things… they reassure us we are doing the right thing,” Brocklebank noted.
“If you are different, it’s inevitable that your performance at some point is going to lag the market and when a fund manager underperforms, the approach to the business will be affected,” he said.
“Firstly, you’re going to lose clients; secondly, you are not going to get new clients, and thirdly, your revenues are going to go down because your fees are going down.”
Brocklebank used the ‘tech bubble’ of the late 1990s and early 2000s as an example of a period when investors collectively piled into stocks at overinflated prices, heightening demand.
“As a manager during the tech bubble you may have thought that holding no technology shares was the right thing to do but all of your clients and everybody else was holding technology shares,” he said.
“If you don’t do what the rest are doing, at some point in time, either the portfolio manager is going to get fired by the management team, the clients are going to fire the company or the shareholders are going to fire the management team.”
Performance of indices 1997-2002
Source: FE Analytics
Brocklebank said investors are increasingly of a “shareholder maximisation mindset” which he believes is a problem that affects managers’ investment decisions and pulls it towards becoming more like an index-tracking business.
“If you have external shareholders, they are always going to want smooth profits, they’re always going to want to avoid periods of volatile earnings,” he noted.
“They will pressurise you to grow your assets as big as possible and to stick with what is trendy or to be more short-termist.
“The commercial pressures on asset managers are such that they make it harder even if you have great people who are willing to invest differently.”
On top of that, the Orbis director said the way fees are structured punish investors during hard times, making it difficult for them to remain invested when a fund underperforms.
For that reason, Brocklebank believes investment decisions should always be put ahead of commercial decisions with fee structures having a performance component to them.
“Investors are selling out, and the way the industry is structured and the way the fees work makes it harder for them to stay invested through the down times,” he explained.
In line with his views, Brocklebank said Orbis is “different to the industry” when it comes to structuring fees as it’s a performance-based fee strategy where funds have to beat the benchmark before earning a fee.
“We pay all of the ongoing expenses and we only charge a performance fee, but that performance fee is not paid to us directly,” he explained.
“If we outperform, a performance fee charge is calculated as 50 per cent of the outperformance. That performance fee which is charged to the fund gets put in a reserve and that reserve sits there.”
Brocklebank added: “If we subsequently underperform, the money in the reserve flows back as a refund in the same rate to the clients.
“We can get paid only if there is something in that reserve and we draw in a rate of one third of what is in the reserve per annum, but it’s capped.
“The maximum amount we can receive as a fee is 2.5 per cent, which is high, but, there has to be 7.5 per cent in the reserve and we have to have generated a 15 per cent outperformance in order to do that.”
Brocklebank said: “We save some money in the good times and put it away to soften the bad times; we are not trying to be the next Blackrock or Fidelity, size doesn’t matter to us, we’re looking to help clients stay on this journey and stay invested.”
Performance of funds over 3yrs
Source: FE Analytics
Orbis’ have three team-managed funds within the Investment Association universe: Orbis Global Equity, Orbis Global Balanced and Orbis UK Equity.
The two five FE Crown-rated Orbis Global Equity and Orbis Global Balanced have both outperformed the MSCI World benchmark over three years.
The Global Equity fund has delivered a total return of 56.19 per cent over three years, while the Global Balanced fund is up by 40.43 per cent, compared with a gain of 34.07 per cent for the MSCI World index.
The Orbis Global Equity fund charged a performance fee of 3.72 per cent last year, according to its key investor information document (KIID), while the Orbis Global Balanced fund levied a fee of 3.68 per cent.