Pooled Fund Net Returns & Expense Ratios

Looking for a little distraction to kick-start the spring?  We are highlighting five top performance Q&A’s focused on pooled fund expenses.

1. Someone said that the expense ratio should be annualized. What is the source for this requirement?

In the Explanation of the Provisions for Section 6, 6.A.5 it states that “Pooled fund expense ratios that are calculated for periods of less than one year must be annualized.” The expense ratio may also be shown in an exhibit if the exhibit is provided along with the GIPS Report.  Important consideration: During the first year of a fund’s life, expenses are often capped.  An annualized partial-year expense ratio would not ever be larger than the fund’s stated maximum annual expense ratio.

2. Can a firm present the highest management fee and expense ratio for a pooled fund, in place of presenting management fee and expense ratio for each share class?

Yes, the firm may choose to present a model management fee and expense ratio for the fund as long as the resulting net return is equal to or less than the returns if the firm had used actual fees. This can be accomplished by applying the highest management fee and expense ratio for a share class of the fund. If the fund has multiple share classes, the firm may present multiple expense ratios. 

3. Is it enough to state the LDPF fees in a GIPS Composite Report, but have the Net of Fees Returns based on the standard investment management fees for separate accounts?

Yes, as long as the management fee used to calculate net performance is the highest effective management fee for the year.  The highest effective fee for a composite is the application of all of the actual LDPF and SMA fees on the total composite assets.  

4. Some of our funds short securities. The expense ratio in the financial statements includes dividends on short positions as expenses. Is this the right expense ratio to report?

The GIPS Standards require firms to present the total fund expense ratio in the GIPS Pooled Fund Report.  Typically, the fund’s total expense ratio includes expenses related to dividends on short positions.  The total expense ratio for most funds can be found in the Annual Report in the Notes to Financials Section. 

5. I assume with the current SEC audit focus, MWR GP cash flows MUST be removed from NET performance showing only Aggregate LPs to avoid overstating with lower GP fees. (Gross it would not matter)

Yes, since the GP does not pay management fees, the LP returns would need to be shown net of fee performance.  The LP returns would be the best representation of what a prospective investor would expect to receive if they invested in the fund.