VGI Partners Global Investments is a global long/short
equity fund that is floating as a listed investment company (LIC) on the ASX.
The float hopes to raise between $100 to $300 million.
I was initially quite interested in the upcoming float
and thought it was admirable that VGI was absorbing the costs of the float so
that the LIC’s net asset value (NAV) per share would be the same as what
subscribers to the float paid for their shares. However, my admiration soon
evaporated when I read the fee structure detailed in the prospectus.
VGI will charge a management fee of 1.5% (plus GST) on
the value of the fund – this is par for the course and I have no major issues
with this. What I do have major issues with is the performance fee. VGI will
charge a 15% performance fee (plus GST) on any positive performance (less
management fee).
What this means is that there is no benchmark
performance hurdle that VGI Partners Global Investments has to exceed before it
pays performance fees. It will pay performance fees on any positive
performance.
This is highly unusual. I can’t think of any other
similar type of fund that does not have to exceed a performance hurdle (usually
the return on a benchmark index such as the MSCI World Net Total Return Index)
prior to being charged performance fees.
Performance fees should only be paid to managers who
generate “alpha”, i.e. performance which is above a relevant benchmark index. The
fee structure for VGI Partners Global Investments allows the LIC to be charged
“performance” fees for under-performance of a benchmark index!
To understand what this means, the following table estimates
what the results will be for shareholders over a 10 year period based on
different annual average compound rates of return for the LIC (assuming that
the LIC’s shares trade at NAV). It also shows the estimated dollar value
of fees that VGI will charge based on those rates of return:
You can begin to see how lucrative this fund will be for
the proprietors.
The very unfavourable terms for shareholders are that
the performance fee is calculated on a “high water mark” which is the initial value of the fund, when in
fact the high water mark should be the initial value of the fund plus the return
on whatever benchmark index is comparable.
For example, if VGI raises $300 million and earns a
return of 8% in its first year, it will have earned $24 million (pre-tax). The
management fee of 1.5% will be charged (it will be more than $4.5 million, but let’s
say it’s $4.5 million for simplicity). That $4.5 million is then subtracted
from the $24 million to arrive at $19.5 million and the 15% performance fee is then
charged on $19.5 million which equates to $2.925 million (exclusive of GST).
Ok, so of that $24 million return, investors share in approximately
$16.575 million (pre-tax) after fees. And if the benchmark index has returned
say 10%, the investors (in aggregate) could have put their money in a low cost
index fund and received the equivalent of close to $30 million for the year.
The total fee in the above example represents just shy
of 31% of the fund’s return.
Nothing that VGI Partners does is rocket science. I would
happily pay Renaissance Technologies their incredibly high fees for what they
do. I would also pay someone like Manoj Narang (now at Mana Partners) for what
he does, because what they do is absolutely impossible for the average investor
to replicate and they have outstanding records. What VGI Partners do is very
simple for many retail investors to replicate.
Here are all of VGI Partners US holdings as at 30 June
2017 – think you can replicate that portfolio?
Of course you can, and at vastly lower cost than what
VGI charges.
The VGI Partners Master Fund also holds short positions
(as can the LIC), but the Master Fund has rarely been much more than 25% short,
which means that over time it has definitely had a long bias in a very
concentrated portfolio. This, in my opinion, means that there is very limited
downside protection in a market crash.
The VGI Partners Master Fund is also a unit trust, so
it pays no income tax and as such, its reported returns are pre-tax. If you
factor in the tax that is paid to investors on distributions from that fund,
the returns do not look anywhere near as good in comparison to the MSCI World
Net Total Return Index.
So in summary, I’m giving this IPO a miss. The fees are
way too high and not at all justifiable for an outfit that only has nine years
of performance history.
Note: None of the above constitutes investment advice,
it represents the opinions of the author only. You should seek appropriate
professional or financial advice regarding the appropriateness of investing in
any securities.
