A novel new fund group is launching two funds that will undoubtedly fan the flames of competition among its subadvisors.
Quintara Capital Management, a new investment advisor in Piedmont, Calif., filed a registration statement Oct. 24 for the creation of the Quintara Small Cap Value Fund and its sibling, the Quintara Small Cap Growth Fund.
These funds go where no other small cap funds have dared to tread: The no-load funds have not one, but two layers of built-in performance incentive fees which reward positive benchmark-beating performance.
The funds are the brainchild of Quintara CEO Matthew Sadler, an 18-year industry veteran who most recently ran Charles Schwab & Co.'s fund relationship group, which negotiated with outside mutual fund advisors. Sadler also had a lead role in running Fidelity Investment's FundsNetwork supermarket program.
As the small-cap funds' main investment advisor, Quintara Capital will receive a basic annual management fee of 0.5% which can be increased by 10 basis points to 0.6% or decreased by 10 basis points to 0.4%, depending upon whether the fund beats or lags its benchmark.
A performance incentive fee paid to the fund's advisor is somewhat unique. According to Morningstar, of the 13,289 publicly available mutual fund share classes, 179, about 1.3%, sport management fees with performance incentives.
But Quintara's second layer of incentive fees puts these new funds squarely in a league of their own.
According to the funds' preliminary prospectuses, each fund will have a total of five subadvisors who will each preside over an equal 20% slice of the fund's assets and will be equally allocated new fund inflows.
Subadvisors Take a Dip
In the Bonus Pool
For their management expertise, these five managers will collectively receive an annual fee of 0.50% (0.10% to each manager) which will be paid from a separately charged subadvisory fee based upon the fund's level of assets. This 50-basis point subadvisory fee will be paid to the subadvisors regardless of whether the fund's performance is handsome or horrific.
But, to sweeten the incentive, Quintara is dangling a 0.15% special performance bonus carrot--again an asset-based fee borne by fund shareholders and not out of Quintara's pocket.
This additional 15-basis point fee will not be immediately paid to the subadvisors but will instead be escrowed into a bonus pool.
Each subadvisor will be required to outperform their designated benchmarks to qualify for the bonus pool.
The subadvisor that outperforms the other four through raw performance numbers, takes home a hefty 60% of that bonus pool. The subadvisor with the second best performance will keep 30% of the bonus, and the manager with the third best performance will take the remaining 10% of the kitty.
According to the fund's prospectus, the two fund subadvisors whose performance falls to fourth and fifth place get shut out and earn no bonus.
Rallying for Performance Fees
"I'm a firm believer in performance fees," said Sadler who expects to get the SEC's approval and to launch the funds by next April. These funds directly align the interests of the subadvisors with the interests of the funds' shareholders because both want great performance, he said. But the funds do offer a novel twist, he added. "The subadvisors have to outdo the index and outdo each other. I like [it] when the advisor and subadvisors can get more when they do well for shareholders and get less when they don't."
Quintara will measure an individual subadvisor's performance over a rolling three-year period, but the initial performance evaluations will be performed annually or over the life of the fund until the fund reaches its third birthday, Sadler said. The three-year period was chosen to discourage managers from taking excessive risks aimed at pumping up the performance on their portion of the fund.
In addition, if the subadvisors don't meet their benchmarks and consequently don't earn the bonus, the amount remaining in the pool will be rolled over for next year, and the following year's subadvisory bonus fee that is charged will be reduced by the amount that has been rolled over, Sadler said.