Jeffrey Bunce: Norrep Capital Management, a small Calgary-based asset manager, recently announced the launch of a new share class for three of its mutual funds. This class, available to advisors and investors using a fee-based account, is unique in that it charges a flat management fee of $1000 plus expenses and taxes per fund, per account. Norrep states this type of management fee is a first of its kind in Canada.
The traditional, almost universal fee model charges a fixed percentage rather than a fixed dollar, so the more money a manager has, the more they make. Under this new model, though, Norrep will charge a fixed annual amount regardless of the asset base. Although an account minimum of $100,000 and an account maximum of $1 million may limit its usage.
When you sit down and do the math for various scenarios, this new pricing method can be very attractive. At the account minimum, the fee of $1000 would translate into a 1% management fee, which after fund expenses and taxes would get you to a management-expense ratio upwards of 1.3%. If you compare that to the median fee-based Canadian equity fund, which levies 1.1%, it's competitive but not such a great deal. The picture quickly changes, though, for larger account sizes. At $200,000, the MER would come in well under 1%. At the max account size of $1 million, you're looking at an MER closer to passive ETFs than actively managed mutual funds. To be fair, most mutual fund managers offer fee-reductions at various account sizes for high-net-worth clients, but you'd be hard pressed to find any active mutual fund manager offering pricing this low on a $1 million account.
By no means does this new pricing ensure Norrep funds will experience favourable investment results, but the price hurdle, particularly for larger accounts, has been significantly reduced.
It'll be interesting to see if Norrep is successful in gaining assets, and whether others adopt this pricing strategy. Large established players, though, would likely lose a lot of revenue under this kind of pricing regime, so don't hold out hope for wide spread adoption.
For Morningstar, I'm Jeff Bunce.
