Growth fees may hurt unitholders

Posted On Wednesday, 10 November 2004 02:00 Published by eProp Commercial Property News
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If the listed property sector is to grow, external asset managers of listed property funds have to ensure they are acting in the best interests of unitholders.

Len van NiekerkThis issue was raised by Andisa Securities property analyst Len van Niekerk at the second annual property investment conference hosted by commercial property association Sapoa and Investment Property Databank (IPD) last week in Sandton.

Van Niekerk says asset managers are entitled to a fee when they grow the property portfolio. But he says that the structuring of asset management fees means there is an incentive to grow a fund .

This means there is always a potential danger that asset managers may grow the fund simply because of the fee incentives rather than in the interests of unitholders.

There have been many debates about whether it is better for listed property loan stock companies to have in-house management, where management also holds significant shareholdings in the fund, or external asset management structures separate from the fund.

Listed property unit trusts have to use outside management companies in terms of the Collective Investment Schemes Control Act, but property loan stock companies do not have this restriction.

Catalyst Securities MD Andre Stadler says both in-house management structures and external asset management companies can work.

Stadler agrees that fee incentives can work against unitholders' interests, but says that sometimes where a fund has in-house management that also has a significant unit holding in the fund, transparency may deteriorate and management may misrepresent performance to protect unit prices. "There is no perfect scenario," he says.

The best way to police both types of management structures is shareholder activism, he says.

"If asset managers are not acting in the best interest of a fund, a vote against a decision is for shareholders to sell their shares. That is just natural policing." The same applies to in-house management structures, he says.

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