Performance fees are additional fees charged by investment managers when their returns exceed a specified benchmark. In superannuation, performance fees are most common in options that use active management — particularly those with exposure to unlisted assets, hedge strategies, or external specialist managers.
How Performance Fees Work
A performance fee is structured as:
“X% of investment returns in excess of the benchmark”
Common structure:
- Performance fee: 15–20% of returns above the benchmark
- Benchmark: Often CPI + a fixed percentage, or a market index (e.g., ASX 200, Bloomberg AusBond)
- Calculated annually or quarterly
Example:
- Benchmark: CPI + 3% = approximately 5.5%
- Actual return: 9%
- Outperformance: 3.5%
- Performance fee: 20% × 3.5% = 0.70% of assets
In this case, the member still benefits (net return = 9% − 0.70% = 8.30% vs benchmark of 5.5%), but the fee is significant.
Where Performance Fees Appear in Super
Performance fees are most common in:
| Option type | Performance fee likelihood |
|---|---|
| Indexed options | Rare — benchmarks are the index itself |
| Diversified growth/balanced (active management) | Moderate |
| Infrastructure and private equity | Common |
| Hedge fund / alternatives | Very common |
| Small SMSF using external managers | Common |
Large industry funds (AustralianSuper, Hostplus, Aware Super) use external specialist managers for certain asset classes — these managers often charge performance fees, which flow through as part of the ICR.
How Performance Fees Are Disclosed
Under RG 97 (ASIC’s fee disclosure requirements), performance fees must be disclosed in the PDS. They are typically:
- Included in the Indirect Cost Ratio (ICR)
- Or disclosed as a separate line item: “Performance fee: estimated at X% p.a. based on prior year”
Because performance fees vary year to year (they depend on whether the manager outperforms), the disclosed figure is an estimate based on recent years. Actual fees may be higher or lower.
Are Performance Fees Worth It?
Performance fees are theoretically aligned with member interests — the manager only earns more when they outperform. But in practice:
Arguments for:
- Aligns manager incentives with member outcomes
- May attract higher-quality investment talent
- Justifiable if net-of-fees returns consistently exceed peers
Arguments against:
- “Heads I win, tails you lose” — managers earn performance fees when they outperform but don’t return fees when they underperform
- In a good year for markets, many managers earn performance fees even without genuine skill (market beta, not alpha)
- High-water mark provisions help, but are not universal
- Performance fees can be difficult to predict and compare across funds
The key test: Does the option’s net return (after all fees including performance fees) exceed comparable passive/low-cost alternatives over 10+ years? If not, performance fees are reducing your retirement savings without compensation.
High-Water Mark Provisions
Many performance fee structures include a high-water mark: the manager can only charge performance fees if cumulative performance exceeds all prior peaks. This means if the fund loses money in year one, it must recover that loss before earning performance fees again.
High-water marks are a member-friendly feature — check whether your fund’s performance fee arrangement includes one.
For more: How Super Fees Are Calculated, Indirect Cost Ratio, Total Cost Ratio, How to Read Your Super PDS. For advice on your situation, speak with a licensed financial adviser via MoneySmart.