Fund managers are drawing bigger returns from special investment schemes that charge higher fees, compared to traditional investment assets.
A special fund is a type of a Collective Investment Scheme (CIS) that invests based on a fund manager’s investment strategy, and largely covers non-traditional assets such as real estate, private equity, offshore stocks, and commodities.
An analysis of disclosures by fund managers showed that the unique funds are charging fees of as much as 6 percent per annum, way above the rates of between one and two percent imposed on schemes such as money market funds ( MMFs).
The fund managers of the special schemes also have additional charges, including fees set on high performance and early investor exits, which allows them to draw higher revenues.
The creation of the special funds has allowed fund managers to not only earn higher returns for clients from non-traditional assets such as offshore instruments but also helped them raise their revenue base.
“Fees on money-market funds are running anywhere from 1 to 2 percent. That market has become so competitive and fund managers have to differentiate themselves by seeking higher returns via access to other markets,” Ndovu Wealth Management co-founder and chief executive officer Radhika Bhachu said.
“Starting special funds also makes commercial sense because you can now charge anywhere from three to five percent, driving revenues significantly.”
The Standard Investment Bank- backed Mansa X Special Fund charges a management fee of 5 percent on assets under management or the investor’s running balance per year, and has a 10 percent performance fee on returns above 25 percent, which is the hurdle rate or the minimum rate of return an investor or company requires from an investment or project to consider it acceptable and financially viable.
The fund does not charge redemption fees.
Faida Investment Bank Oak Special Fund has a 6 percent fund management fee but does not charge a performance or redemption fee, while Kuza Momentum Special Fund has a two-percent management fee and a 20 percent performance fee on returns above 12 percent. Dry Associates Special High Yield Fund has a combination of all three fees, including a 3 percent fund management fee.
The fund has a 50 percent performance fee where returns above the prevailing 91-day Treasury bill, plus 0.5 percent are split in the middle between the fund manager and the client.
Early redemption/withdrawals from the fund, meanwhile, attract a fee of between 1 and 3 percent for the first three years.
The Capital Markets Authority (CMA) does not apply a cap to fund managers' fees but requires each player to make adequate disclosures to clients/customers. Fund management fees on funds like MMFs, however, rise to a maximum of 2 percent for most schemes.
Fees charged on special funds, however, widely vary based largely on the strategy and risk profile of each scheme.
All collective investment schemes or unit trusts are required to disclose their fee structure to clients under CMA registration terms.
“A statement authorising the fund manager to make a periodic charge payable out of the income of the collective investment scheme portfolio, and a statement that provides for the charge to be expressed as an annual percentage,” the markets regulator says in CIS registration documents.
Total special funds assets under management touched Sh113.3 billion at the end of June this year and represented funds in 31 approved schemes by the CMA.
This implies that fund managers in charge of the 31 special funds stood to earn between Sh3.3 billion and Sh5.6 billion from fees charged.
Mansa-X Special Kenya shilling fund was the largest special fund in the period with Assets Under Management of Sh65 billion, which gives it a 57.4 percent share of the special funds market.
Other top special funds included the NCBA Kenya Shilling Basket Note (Sh11.4 billion), Britam Special Fixed Income Fund (Sh6.7 billion), and the Oak Multi Asset Special KES Fund (Sh5.7 billion).
