The following examples are simplified and for illustrative purposes only. The actual returns, calculations, and expenses will differ from the ones described below.
The management fee is charged at the account level for our clients. It is charged as a percentage of the assets under management in each account. For example, if the value of an account was $100,000, and the management fee was 1.00%, then a fee of $1,000 per year would be charged.
The Cowan Absolute Return Fund's performance fee is charged at an annual rate of 5.00% of the gains the fund generates.
For example, if the net asset value of the fund was $100 at the start of Year 1 and rose to $110 on the last day of the same year, the performance fee per unit would be:
- ($110 - $100) × 5.00% = $10 x 5.00% = $0.50
The high-water mark is the value of the units at the time a performance fee is paid. A performance fee is paid only if the unit value at the end of a year is higher than the previous high-water mark. The high-water mark is in place to ensure that unitholders don’t pay a performance fee on gains that serve only to reverse a prior loss. In the last example, the high-water mark for Year 2 is $110. This means that a performance fee is paid in Year 2 only if the net asset value exceeds $110 at the end of the year. Continuing with the most recent example, if the net asset value per unit at the end of Year 2 was $125, the following performance fee would be paid:
- ($125 - $110) × 5.00% = $15 x 5.00% = $0.75
In this situation, a new high-water mark of $125 would be established for Year 3.
If, on the other hand, the net asset value at the end of Year 2 was $105, not $125, no performance fee would be paid. This is because the value of the units declined after starting the year at $110. In future periods, a performance fee would not be paid until the net asset value again exceeded $110 per unit.
The Cowan Income Opportunities Fund does not charge a performance fee.
Other costs related to custodial and account duties, brokerage fees, and HST are also subtracted from the fund’s assets. These costs vary and depend on a number of factors such as the volume of security transactions that are undertaken by the fund.
Importance of Fair Fees
To quantify just how much of a difference fees can make to a portfolio’s net returns, we provide the following chart. It shows how the value of a hypothetical portfolio, which starts with $1 million in assets and compounds at 10% per year, varies depending on the fees that are charged. In blue, we show the impact of a 1% management fee and 5% performance fee. The grey dotted line shows fees charged at the rate of the average Canadian mutual fund. The black dashed line shows the fees charged by a traditional hedge fund at “two and twenty”, or a 2% management fee and 20% performance fee. As the chart shows, despite the fact that each portfolio generated the same gross investment returns, differences in fee structures can make a profound difference after 10 years of compounding.