Milford to raise performance hurdles

Listings on the main board have dropped off, with only one company Fliway Group listing on the exchange, after a flurry activity of last year, fuelled in part by the government's sell down of its utility companies. Photo NZME.

Milford Asset Management is to increase the hurdle it must meet to earn a performance fee on its Income Fund and may do the same for its other funds including its KiwiSaver offering.

The fund manager wrote to investors this week to tell them it will have to beat the official cash rate plus 2.5 per cent to earn its bonus on the fund from September 1.

At the moment the Income Fund's aim is to beat what investors can get by putting their money into a bank deposit.

If it does so Milford can claim 10 per cent of the extra return after its management fee is taken into account.

It charges 0.65 per cent of funds under management as an annual fee.

At the same time the fund will increase the percentage of money it invests in shares from up to 45 per cent to up to 50 per cent and change its name to the Milford Diversified Income Fund.

Performance fees are seen as controversial as a fund manager usually sets its own hurdle to beat.

It also means managers have two ways to earn fees off the money they manage - through an annual management fee and a performance fee which can make it hard for mum and dad investors to work out exactly how much it is going to cost to invest their money in a fund.

Milford is one of the few retail fund managers which uses performance fees in New Zealand.

Milford managing director Anthony Quirk said it was appropriate to review the fund's fees and benchmark given its change in share allocation.

"An OCR +2.5 per cent is a representative benchmark to compare the fund to given the new potential increase in share allocation. This is something we have been working through for some time."

Quirk said the decision had not been driven by investor pressure and the fund had been one of its most popular over time.

Since its launch in March 2010 the fund has had an average annual return of 12.82 per cent after fees and before tax.

The letter also indicated Milford would be changing its investment targets for its other funds as well as launching a new conservative fund.

"We have also reviewed our performance fee methodology for the Milford Dynamic, Trans-Tasman, Global, Active Growth and Diversified Income Funds," Quirk wrote in the letter.

"As a result of this we have enhanced the high watermark methodology, including removing the ability to reset the high water mark after three years.

"Also performance losses incurred will be brought forward into subsequent performance periods."

Further details would be provided in new investment statements and prospectuses for its KiwiSaver plan and Unit Trusts, Quirk said.

Milford has been under the spotlight of late and last month reached a $1.5 million settlement with the Financial Markets Authority following an investigation into alleged market manipulation.

Five clients have pulled $130 million in funds from the manager since then.

In total Milford manages more than $3 billion including its KiwiSaver funds.