Meet the Manager Willing to Give Investors Back Their Fees

An innovative fee structure means fund firm Orbis returns money to investors in down years.


Investors in actively managed funds have long complained that not only are fees too high, but some fund managers operate in a “heads you win, tails I lose” environment.

In other words, managers get to charge high fees during good years but are not penalized if they subsequently underperform and lose investor capital. With no form of clawback, some fund managers, and in particular hedge fund firms, have an incentive to swing for the fences, rack up a few good years, and then sit back and become underperforming asset gathers.

Not so Orbis Investment Management. The $28 billion, Bermuda-based global equity manger has a different approach: it actually gives money back to institutional investors in years when it does not beat its benchmark. “All fees are performance based, but we return the fees in periods where we underperform,” explains Adam Karr, Orbis’ U.S. managing director, who is based in San Francisco.

Investors in Orbis’s funds who opt to invest in the refundable fee structure have two options to choose from: either a flat performance fee of 33 percent above a benchmark, or another option in which investors pay a base fee of 45 basis points or less, depending on the amount of assets, and a performance fee of 25 percent above a benchmark. Investors are eligible for a refund when the funds underperform their benchmarks.

The fees that the manager earns are placed into a trust account created for the client. Orbis only takes a fee once the trust account has reached 3 percent of client assets. If the manager underperforms, the fees go back to the investor.


The result, Karr says, is a far greater alignment of interest, especially for those clients that choose the option of no management fee and 33 percent above a benchmark. (Most investors choose to pay a management fee.) “For us it is not an asset-gathering game,” says Karr. “We do not make money off the base fee.” In order for Orbis to cover its costs, it needs to outperform. “The reason we can exist is that we have to generate alpha,” says Karr.

A value focused, bottom-up stock picker, Orbis offers a number of global equity strategies to investors. Since its 1990 inception through June 30, the firm’s flagship global equity strategy has generated an annualized return of 12.1 percent net of fees, verses 6.4 percent for the benchmark.

Orbis began offering its refundable fee structure in 2004. This feast or famine fee structure, however, can lead to lean years. But due to its unique structure, the firm has been able to survive.

Orbis was founded in 1989 by Allan Gray. South African-born Gray earned an MBA from Harvard University after which, in 1965, he worked for Fidelity Management. In 1974 he returned to South Africa and started his own investment firm, Allan Gray Property Ltd., which now manages $30 billion in assets and is the largest privately-owned money manager in the country. Orbis was founded as a way for Allan Gray clients to invest outside of South Africa.

Gray, 79, who lives in Bermuda, has put his ownership of Orbis into a trust structure, insuring that the firm can exist in perpetuity. The trust also helps insure the firm has financial resources to draw on in hard times, when it cannot rely on performance fee income.