Fees and Returns
“But how was the play, Mrs. Lincoln?” was something my friend and former colleague Chris Hill (he has a new show) used to say on the Motley Fool Money podcast when it became clear that someone had completely missed the point.
I was reminded of it the other day when we were talking to a potential partner about our fees and returns.
He said that while he admired our strategy and appreciated that we charge no fees below a hurdle rate, our fees were “higher than standard” if we performed well. In other words, even if we delivered strong gross returns, his net returns would be lower than they would be with a similarly-performing manager charging more “standard” fees.
That, of course, is a tautology.
If two managers deliver the same gross performance, the one with lower fees will have higher net returns. But if one delivers significantly higher gross performance, the fee is beside the point. And if a manager loses money, they could work for free and the result would still be disappointing.
Paying for performance makes sense. Paying for underperformance does not.
All of this is somewhat academic anyway. When we looked this potential partner up, they were losing money in our asset class. In theory, they could pay almost anyone almost anything, and if that manager did better than lose money, it would be accretive.
So yes – how was the play, Mrs. Lincoln?
– Tim
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