Funds 'perform better' without performance fees
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Performance fees on investment trusts have not led to an improvement in portfolio performance, new research from Grant Thornton indicates.
According to its report, Performance Fees: a Question of Purpose, about 45 percent of mainstream investment companies now remunerate managers with some form of performance fee. However, the report finds that rather than the fees improving the performance of funds, on average funds without fees performed better than those with them. This is based on analysis of a sample of trusts between 2003 and 2007, comparing 24 trusts with performance fees to 24 trusts without.
Data provided by the Association of Investment Companies (AIC) shows that companies with performance fees have historically beaten their benchmarks 53 percent of the time, whereas those without outperformed 59 percent of the time. However, the report notes that the results do not take into account that performance fees are often introduced when a fund is underperforming or when a new manager takes over. Furthermore, the findings are based on equating performance with beating a benchmark, which it says is only a simple measure.
Based on interviews with fund managers, the report states that most manage their portfolio in the same style whether or not it carries a performance fee. This tends to go against the classic argument that fees align the interests of shareholders and the manager.
As a result, the report says, boards need to have clearly defined purposes and objectives when introducing performance fees. At present, it notes, many fees amount to a missed opportunity and sometimes a distraction to managers.
The study looked at performance fees in a population of 240 investment companies that were AIC members.
