IFM Investors will rebate 7.5% of its base management fees for the year to June 2018 to LPs, the first time it has done so in six years, as the pressure to deploy funds while cutting fees continues.
Chief Executive Brett Himbury announced the move today citing higher than expected returns across most of its asset classes and a desire to cap its gross profit margin at 25%. IFM’s pre-tax profit margin had grown to that level for its 2018 financial year.
He would not disclose how much the rebate would be, but said it amounted to “tens of millions” of dollars.
“IFM has continued to [record] very strong performance, particularly in terms of investment returns,” he told reporters. “That in turn has given rise to new clients, which has driven a profit that we weren’t otherwise expecting. Given the ownership and purpose of IFM, we decided the best thing for us to do is to offer a rebate.”
IFM is owned by 27 Australian industry super funds.
Himbury said IFM had rebated fees about six years ago and since then had been reducing its base fees, however it had not cut fees in the past year.
It reported 89% of “mandates and products” across infrastructure, debt, listed equities and private equity had outperformed or met client objectives.
Himbury said the rebate is part of a broader capital management plan to invest more in their capabilities as well as retaining some capital on its balance sheet to be ready for new opportunities and a “range of uncertainties” globally.
Himbury argued that fund management remained one of the most lucrative sectors with unnecessarily high profit margins.
“This is really simple. Asset managers – a lot of them are not outperforming. That sort of behaviour needs to stop,” he added. He argued most fund managers are getting a post-tax margin of more than 40%.
He said “insourcing”, or direct investment by LPs is one result of that. Another will be LPs using fewer GPs. “We are enthusiastic about that trend at IFM.” Some of the large funds that are investing directly have also increased their allocation to IFM at the same time, he said.
An IFM-led consortium on Friday lost out to a Transurban consortium in the bidding for the giant WestConnex project after the Australian Competition and Consumer Commission (ACCC) approved the toll road operator’s bid, but on the condition that Transurban regularly release traffic data on its NSW toll roads to aid competitors.
Himbury said IFM didn’t agree with the ACCC’s conclusions on Transurban but said: “we move on”.
IFM is still finding opportunities to invest globally, but he conceded that post WestConnex in Australia the opportunity for large infrastructure investors to deploy funds is limited and Himbury repeated calls on state governments to consider selling assets to super funds.
“We’re still finding opportunities in debt, private markets and equity. What we’re increasingly able to do, given our scale, is do this alone,” he said. That included taking listed companies private, as he has previously flagged.
“We’re a long-term investor. [In Australia] there are current political barriers, but superannuation can, must and will play a greater role in funding [infrastructure] in Australia. Shorter term we have some challenges,” he said.
He named the water sector, which is largely still in public hands in Australia, as a “massive opportunity”.
“Some states that are opposed to privatisation, they must engage with the private sector.”