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MiB: Only Charging a Fee When They Outperform

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MiB: Only Charging a Fee When They Outperform

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How would you like your active asset manager to only charge you for the alpha they generate? Even better, what if they refund fees when they fail to provide beta?

That is the approach pioneered by Orbis Investments. Adam Karr, head of the firm’s US division discusses this unique fee approach for the $37 billion in assets Orbis manages. Its flagship fund, the long only Orbis Global Equity accounts for 67% of their assets, and has compounded at 11% annually, outperforming its benchmark since its 1990 inception. The firm was founded in 1989 in South Africa by Allan Gray, a former Fidelity Fund manager.

The firm’s fulcrum fee — introduced in 2004, and discussed here in 2018 — is rather unique in the industry. Institutions pay nothing unless the firm beats its global benchmark; when that happens, the clients pay 25% of the outperformance. Part of that fee goes into a trust, which is used to refund fees if and when the firm underperforms. Managers believe this fee structure fully aligns the firm’s interest with that of the clients’. The firm and its employees are the fund’s largest investors.

Allan Gray, the firm’s founder, went on to become the largest investment manager in South Africa. He became a billionaire and philanthropist, created the non-profit Allan Gray Orbis Foundation and Charitable Trust, and donated his stake in Orbis / Allan Gray Investment Management into the firm’s foundation.

A list of his favorite books are here; A transcript of our conversation is available here.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Andrew Beer, Founder and Managing Member of Dynamic Beta investments. The firm manages several ETFs that seek to replicate illiquid alternatives at lower costs, with full transparency and daily liquidity. Their hedge fund replication fund, iM DBi Long Short Hedge Strategy ETF (DBEH) is up 27.7% since it launched in December 2019.

 

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