Orbis Isn't Afraid to Refund Fees for Poor Performance
(Bloomberg Opinion) -- What if your active asset manager only charges you for the alpha it generates? Even better, what if it refunded fees when failing to provide beta? Such is the approach pioneered by Orbis Investment Management Ltd. Adam Karr, head of the firm's U.S. division and this week’s guest on the Masters in Business podcast, discusses this unique approach to fees for the $37 billion managed by Orbis.
Orbis was founded in 1989 in South Africa by Allan Gray, a former Fidelity fund manager who became a billionaire and philanthropist. Gray created the non-profit Allan Gray Orbis Foundation and Charitable Trust, and donated his stake in Orbis/Allan Gray Investment Management to the firm’s foundation.
The firm’s flagship Orbis Global Equity fund accounts for 67% of assets, and has had a compounded annual return of 11%, outperforming its benchmark since its 1990 inception. The firm's fulcrum fee -- introduced in 2004, and discussed here in 2018 -- is rather unique in the industry. Investors pay nothing unless the firm beats its global benchmark; when that happens, 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 aligns the firm's interest with clients. Orbis and its employees are the fund’s largest investors.
A list of Karr’s favorite books are here; A transcript of our conversation is available here.
Be sure to check out our Masters in Business next week with Andrew Beer, the founder and managing member of Dynamic Beta investments. The firm manages several exchange-traded funds 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, is up 27.7% since it launched in December 2019.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”
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