ANREV has produced its first ever study on fund management fees as it seeks to improve transparency in the region. Clara Lee reports
If the Asian non-listed property funds industry is to secure a high proportion of the growing volume of capital looking in its direction, then transparency has to be a key aim. One such area that investors have looked for further insight into is on the topic of fees.
ANREV has just completed its first ever study into fees for funds in the region. The results of the ‘Management Fees & Terms Asia Study' offer investors and fund managers access to key information on the fee structures and levels across the region to support their business needs. It enables the industry to gain clarity on market practice for fees, so investors can easily see how fee structures and levels compare to the market average.
However, from an industry perspective, it also highlights the fact that fee structures
lack comparability. Non-listed property funds base their charges on a wide variety of type, number and bases of fees, which hinders transparency and makes it difficult for investors to review and compare funds. The results show that the industry can improve its approach to fees with the use of tools such as total expense ratios. The sector can also expect changes in future fee structures due to lessons learned through the downturn.
One main example of the lack of comparability within fee structures is the basis on which annual fund management fees are charged by funds. This type of fee, which generally covers services such as managing the fund level structure, fund administration, fund reporting, and investor relations is charged by 88% of all funds in the sample. When broken down by style that is 88% of core funds, 85% of value added funds and 91% of opportunity funds.
However, when you break down how fund managers charge that fee, you find another layer of complexity due to the different bases on which the fee is charged. In the study, 77% of core funds charge this fee on a gross asset value (GAV) basis, compared with just 18% of value-added funds and 3% of opportunity funds. For value-added funds, the most common basis is drawn commitment at 36.4% of funds, while commitment is the preference among 40.6% of opportunity funds. Other bases also exist, including net asset value (NAV), fees based on invested equity or the acquisition price of the assets.
It is understood that there will always be variety in the types of fees charged by style due to the nature of investing, but how this information is presented needs to be improved. What has to be considered is that investors will often find themselves trying to compare funds across their portfolio or reviewing a number of funds for new investments. Therefore, they require a comparison tool which enables them to make easier assessments of fees. This is where tools such as total expense ratios (TERs) can be useful in the industry's development in the region.
ANREV supports the use of INREV TER, which is a measure of annual operating costs as a percentage of value of the assets, which forms part of the fee metrics recommendations in the INREV Guidelines. TER helps investors compare fee loads for funds and enables them to perform fee analysis across their portfolios and as part of their due diligence for new funds.
The use of TERs is still low in Asia with 23% of funds reporting a TER, of which 55% report INREV TER. The high adoption of INREV TER within this small sample is partly due to the number of international fund managers who report to investors consistently on a global basis using INREV Guidelines. ANREV is committed to supporting the adoption of INREV TER by fund managers in the region.
Another area that has received more attention from institutional investors since the downturn is that of performance fees. These fees are a useful incentive to reward outperformance. They can also ensure better alignment between investors and fund managers.
However, during the financial downturn investors started to question the structure of fees as some fund managers continued to be rewarded performance fees for funds that were now performing less well then expected.
The results of the study show that performance fees are a key part of the fee package in Asia Pacific. Nearly 90% of funds in the survey apply a performance fee either periodically during the life of the fund or on termination. Interestingly, 64% of core funds charge a performance fee. This is unusual as this type of fee structure is normally associated with higher risk-return funds, with 92% and 100% of value-added funds and opportunity funds, respectively.
The majority of core and opportunity funds, at 56% and 45% respectively, charge performance fees periodically during the life of the fund, while 45% of value-added funds charge the fees at termination.
This is one area where changes could be ahead for fee structures following the downturn. Performance fees are less likely to be rewarded periodically as investors show a clear preference for payments at termination when the final performance of the fund is known. Other changes could be around the basis of regular fees with fewer funds expected to have fees based on GAV, since this is seen as rewarding performance for gearing.
With lower numbers of funds launched in the past two years, such changes are not yet fully visible in the result of ANREV's report, but the effects of the financial downturn are expected to show in future reports.
The fees study comprises detailed information on the fee structures and fee levels of 86 Asian non-listed property funds from 32 managers. The study is based on similar studies undertaken by INREV in Europe and PREA in the US.
The three organisations have worked together on a global comparison study (see article opposite) to provide valuable insight on fees on a pan-regional level.
Clara Lee is research director at ANREV