How are fees charged in a managed fund?

A new year has been celebrated at the Montgomery office, and with the New Year we thought we would revisit one of the most frequently asked questions from prospective investors: how are fees charged in your managed funds?

Whilst obvious to some, the raft of investment strategies out there and the addition of exchange traded funds (ETFs) have made the question around fees ever more complex for the retail investor. In this article I attempt to simplify the equation for investors looking at managed funds by splitting fees into three broad categories of consideration, each listed and explored below.

Management fee

This is the most common fee associated with a managed fund investment, no matter what asset class or style of strategy you are investing in. This fee is a fixed cost that is, more often than not, represented as a percentage of the dollar amount invested per annum.

Why is it represented as a percentage? Managed funds are asset linked (or backed) and the value of your investment can change. In the case of The Montgomery Fund or Montgomery Small Companies Fund, this fee is actually factored into the daily unit price, or the net asset value (NAV) of the fund each trading day. The same principle would be true for funds that are priced less often, such as monthly or quarterly, and funds that are backed by different assets, such as property or credit. The management fee charged also can vary depending on the type of investment strategy and the underlying managers mandate (or objective). Key is whether the strategy is active or passive fund, and the degree of flexibility the underlying manager holds under their investment mandate. In the case of equities, such flexibility would include the ability to invest across market caps or even the ability to use derivatives or hybrids. The management fee can also vary according to the asset class the fund invests in, for example unlisted assets or alternatives may attract a higher management fee versus traditional asset classes.

Performance fee

This kind of fee is connected to managed funds that are actively managed and are trying to outperform their respective benchmarks over a said period. As such, this fee component is a variable cost and is dependent on both how the managed fund and its respective benchmark perform over a said period. This performance calculation is generally done on an after management fee basis and can vary in both accrual and payment timing. For example, the Montgomery Small Companies Fund accrues its performance fee daily however it can be only paid six monthly as at 31 December or 30 June. Depending on the type of managed fund, this fee and the benchmark used can also vary greatly. By way of example, a broad cap Australian equity strategy tends to be benchmarked against the S&P/ASX 300 (like The Montgomery Fund). However, some alternative Australian equity strategies, such as long/short or market neutral funds, tend to be benchmarked against a cash or cash plus hurdle, such as RBA cash or RBA cash plus three per cent.

Is there any right or wrong in terms of performance fees? The first starting point here is performance fees do incentive outperformance, and there are sub-sections of the market where investors are more willing to accept performance fee than others, for example in an equity context when investing in small companies or emerging markets. As always, it really comes down to your preference as an investor. A majority of managers also have what is called in the industry a high-water mark, which means if a manager underperforms their benchmark for a respective period of time after their management fee, the underperformance is carried forward for all ensuing periods. This effectively means the performance fee accrual isn’t wiped clean at the start of a new time period and is carried forward until the underperformance is made up. Also, many managers further insist that a performance fee not is not made payable in a negative performance period on an absolute basis, which means that it is carried forward once the fund performance is in positive return territory (i.e., above zero, and still above the respective benchmark as at the next fee accrual date).

Buy/sell spread

This is probably one of the most misunderstood fees for managed funds. Most people associate this cost as one that is paid to the investment manager in what is deemed as the cost of doing business with them. Moreover, the buy/sell spread represents the cost allowance for trading the underlying assets as a result of you buying or selling units in the fund. Think of this as being very similar to brokerage when you trade a listed company, or simply a transaction cost. However, this cost isn’t paid to the manager, it is actually recouped by the fund to ensure the existing unit holders aren’t disadvantage from a trading cost perspective as a result of units being bought and sold.

Where this cost becomes a little more complex is in a listed managed fund, whether it be an ETF or active ETF. For these types of strategies there isn’t a pre-determined buy/sell spread, but rather one that is determined by the market maker(s). In the Montgomery Global Equities Fund (ASX: MOGL), the trading spread is generally 1 or 2 cents above or below the indicative NAV which is an implied spread of 0.28 per cent.

If you are comparing managed fund and their respective fees it is important to do it on a like for like basis, for example comparing an active, Australian equity fund that tends to be fully invested to another active, Australian equity fund that has a similar investment benchmark and objective. Although many managed funds will provide a dollar estimate of the total fees charged in their Product Disclosure Statements (PDS), it is always key to do comparisons on a percentage basis to keep it like for like and noting a lot of these dollar calculations are backwards looking.

The moneysmart government website, in addition to providing user friendly tips on comparing managed funds, also offers a fee calculator that anyone can use:


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