Eight out of 10 funds that charge a performance fee underperform the MSCI World Index, research by Architas finds.
The analysis of 121 retail funds charging performance fees found 97 underperformed the index over three years based on total returns to the end of August using FE Research data.
It also found the average total expense ratios were 40 per cent higher than the average fund in the IA UK All Companies Sector, with the TER sitting at 1.39 per cent for funds with performance fees compared to 1 per cent for average funds in the sector.
Adrian Lowcock, investment director at Architas, argues that there is no alignment of interests with the investors and the fund manager when the majority of performance fees are charged.
“In the good years you could be paying 4 per cent or more to a fund manager, but that manager does not refund you the fees in the bad years.”
“To make matters worse, there is a clear lack of transparency in performance fees. Trying to find out when a performance fee has been charged and the impact it has on the overall costs to investors is difficult.”
Lowcock says investors are expecting to get a better return when performance fees are charged, but in the majority of cases funds are “significantly” lagging the MSCI index. “In spite of this investors are being charged the additional fee.”