AIB Alpha Japan Property Fund

[kaymin]

I obtained the marketing brochure for the AIB Alpha Japan Fund whose objective is to invest in Japanese property. I was surprised by the high fixed charges and wondered what others thought?

The fund aims to raise equity of €40m and borrow a further €160m. The life of the fund is expected to be 8 years. Fixed charges over the life of the fund regardless of investment performance is:

Initial commission (of 2% of €40m) €0.8m
Acquisition fee of 0.5% for each investment* €1.0m
Investment management fee of 0.5% pa of gross assets for 8 years* €8.0m
Corporate advisory fee of 0.5% pa of gross assets for 8 years* €8.0m
Total €17.8m
As a % of the equity investment 45%

*Value of investments made / gross assets is assumed to be €200m

The Fund will also bear the normal expenses such as tax / legal / directors / audit expenses etc

Based on the above, AIB and the investment advisor will receive almost half of the equity investment by way of fees regardless of how the fund performs. If the fund actually does perform well then the investment manager will be entitled to a further performance fee. This fee rate is not specified in the brochure though I expect it will be 20% of profit. I don't mind paying a performance fee but I can't justify paying half of my equity investment in fees without there being a requirement for the fund to produce a profit.

 

[Del3D]

Wow, with terms and conditions like that, you may be better investing in AIB itself!

I assume that you don't have to cover the financing cost for the other €160m on top of this, and that it is built in somewhere? Even if this was at ECB rates, it would run to €48M. If it is built in, maybe it is not so bad after all?

 

[Calico]

I was looking at this as well as I think the concept is a good one but 8 years is a long time to have your money tied up & after reading those fees I'm turned off.

 

[gonk]

I think this is being a little unfair to AIB. The reason the fees are so high as a proportion of equity is because of the level of gearing in the fund. The reason one might invest in a geared fund is in the hope of higher gains if there is good capital appreciation. If you don't like the idea, there are plenty of ungeared property funds out there too, but 2% initial commission and 1% of the value of assets under management annually are not exceptionally high charges.

If, say, there is 4% p.a. compound capital appreciation, there would be over €73m in gross capital gains, i.e., 182.5% of equity. I have no view on the prospects of the Japanese property market, but the main reason for going into a geared property fund is because one hopes for capital appreciation. In that context, the charges are not unduly high.

 

[gonk]

I assume that you don't have to cover the financing cost for the other €160m on top of this, and that it is built in somewhere? Even if this was at ECB rates, it would run to €48M. If it is built in, maybe it is not so bad after all?

I presume they're borrowing in Japan, where central bank rates are at about 0.5%.