The subject of net-of-fee earnings, as they pertain to the Global Investment Performance Standards (GIPS) came up twice this week already, so I’ll give out the relevant questions and my reactions. First, I used to be asked about firms using “model fees” to derive their net-of-fee returns. I’m unclear as to what a “model” fee is but indicate that it is NOT allowed probably. Rather, firms can use the highest management charge “incurred by portfolios in the composite” as opposed to the highest-mentioned fee. It might be easier to use the highest-mentioned fee, then trying to figure out what the highest charge was rather. Or, firms might use actual fees, which leads us to the second question.
“Thanks for carrying on to talk to us. We appreciate the ongoing work that David does for all of us in the end of 2008, or they have helped us greatly within the last. We have created our composites and wondered if you or David could give us some guidance. We have determined both Gross of charge performance and net of charge performance of the composites. A dilemma is had by us in that the management fees applied to the composite are different for every account. We want to ensure we are reporting this relative to guidelines.
Can you offer any recommendations in this matter? There are many questions here actually, but I’ll summarize. First, I am not an enthusiast of net-of-fee results to start with. And, I’m not by yourself. You want to survey the net-of-fees performance numbers of an amalgamated. Should we condition the real net-of-fees performance comes back for all those portfolios which would reflect the deduction of the actual fee paid by each portfolio, or can a model can be used by us fee? The net-of-fees return is thought as the gross-of-fees return reduced by the investment management charge incurred.
Firms are permitted to use either the real investment management fee incurred by each portfolio in the composite, or the best investment management fee incurred by portfolios in the composite to reduce the gross-of-fees go back to estimate the net-of-fees return. And so exactly what is a model fee? The GIPS Handbook offers no answer. My colleague said it’s whatever isn’t a genuine fee. I recommend that the ONLY other fee you may use is either the best used or the best on your fee schedule, which is both a heck of a lot better a blended charge then.
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