The board of Polar Capital Technology (PCT) has responded to the steep market falls it suffered last year with changes to its performance fee it hopes will encourage fund manager Ben Rogoff (pictured below) to do his best even when share prices are sliding.
Previously Rogoff and Polar Capital only received a performance fee for a year when the net asset value (NAV) of the £1.7 billion investment trust grew faster than the Dow Jones World Technology index. However, the managers were unable to be paid or claim credit for any outpeformance in a period when NAV had fallen below a previous 'high water' mark.
In light of the fourth quarter sell-off, which saw technology stocks hit particularly hard and with the trust's portfolio slumping over 14%, chairman Sarah Bates has demanded a different approach.
In future, Rogoff and co-manager Nick Evans will be able to book any outpeformance generated when markets fall and carry it forward for future payment. However, the previous high water mark restrictions apply and there can be no payment of the performance fee if the NAV remains either below the level the last time a fee was paid or the end of the previous financial year.
‘The board is keen to realign the performance fee to provide an incentive to outperform in falling markets, as well as to outperform in rising ones, and to make sure the manager does not lose that incentive in more difficult times,’ said Polar Capital Technology in a stock exchange statement.
‘The board therefore believes that the outperformance fee should be capable of being recognised in falling markets as well as in rising markets, thereby potentially rewarding the manager for reducing risk.’
Bates and her co-directors have negotiated other changes to ensure the fees paid to Polar Capital are not excessive. The group earned an £11 million performance fee on top of their annual management charge for the year ended April 2018.
Going forward, the fund managers will take a 10% cut of any outperformance they achieve over the Dow Jones benchmark, down from 15%. And the cap on the total they can earn in performance fees has been halved to 1% from 2% to reflect the trebling in the trust's size in the past five years.
In other changes, Polar Capital will now pay all of the trust’s research costs, which amounted to £447,000 in 2018. PCT agreed to foot half the bill at the beginning of last year, as part of European Union regulation – Mifid II.
Polar Capital will also now contribute £100,000 per annum to the trust’s external marketing costs.
The base management fee paid to Polar Capital has also been amended. Currently shareholders pay a tiered rate of 1% on assets up to £800 million, 0.85% on assets up to £1.7 billion and o.8% above that. The third tier, which was added last year, will now apply to assets between £1.6 billion and £2 billion with a fourth tier of 0.7% if the trust passes £2 billion.
All the changes take effect from the beginning of May.
Although PCT was hit hard by the fourth quarter crash, it did better than rival Allianz Technology Trust whose NAV dropped 24% in the last three months of last year.
Over five years, the pair are virtually neck and neck in NAV returns with ATT, whose lead manager is Walter Price in San Francisco, up nearly 210% against 205% for PCT.
However, ATT's share price performance has been stronger, delivering a total shareholder return of 238% versus PCT's 200%. Both beat the Dow Jones World Technology which advanced nearly 181% in sterling terms, according to Numis Securities data.