Update No. 118 – 21/06/13

A short discourse on costs. Specifically on operating expenses. First a re-cap, it was a tough week, our hoodoo is alive. As mentioned last week, we have never had longer than a 4-week winning streak over the benchmark, that remains the case this week. The ASX200TR declined by 1.11% on the week (felt like more didn’t it…), EGP declined by 1.45%.

I discuss frequently my preference for fund managers not to be remunerated based on their funds under management (FUM). This is because I believe it drives the wrong outcomes for the people whose interests they represent. Instead of focusing on delivering superior results in order to earn performance fees, fund managers become marketing experts in order to drive more FUM in order to grow the earnings, considering any outperformance a ‘bonus’ rather than their primary earnings source. Larger funds can harm investors in another way also as it is a great deal more difficult for a manager of $10billion to beat the market by a wide margin than it is for the manager of $10million. Time and again I have said it – managing money alone should be no basis for earning a fee, managing money and delivering outperformance of a predetermined benchmark should be what is required to earn a fee – but controlling the other costs of the business is also an imperative.

Most of the product disclosure statements I read propose an ‘expense recovery’, to recover the cost of ‘ordinary expenses’ in the order of 0.15-0.50% of FUM. This expense recovery is over and above the ‘Management Fee’ which is usually between 1-2.5% per annum.

I usually around this time of year give a rundown of what EGP has incurred by way of ‘recoverable expenses’, and will do so now. As compared to the way other funds calculate ‘recoverable expenses’, as at 17 June 2013, our FY2013 expense ratio has been about 0.11% (I do not expect to incur any further costs in the final week, so that should be our final figure). Despite our very small size giving a disadvantage due to lack of scale, we operate leaner than the majority of other fund managers. If we were operating with 10 times our present FUM, I would hazard this number would be more like 0.02% (our recoverable costs since inception have been about 0.06%).

I am vigilant in seeking to minimise costs because most of my family wealth is invested in EGP and because of a generally thrifty nature. The control of ‘recoverable expenses’ is not nearly as important as an appropriate remuneration structure, but it is something the average investor should be aware of because every expense incurred robs you of compounding power. Only 0.35% additional expense over 40 years will rob you of 15% of your return – Tony Hansen 21/06/13

EGP Fund No. 1 Pty Ltd. Up by 14.72%, leading the benchmark by 10.85% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 39.64%, leading the benchmark by 31.39% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}