Fidelity defends 2% outperformance ceiling on new fees model

Fidelity International has defended its 2 per cent ceiling for outperformance in its new performance fee charging model, arguing it does not encourage index hugging and instead represents a material deviation from the benchmark.

Fidelity yesterday revealed the details of its variable management fee model, a type of fulcrum fee, which it first revealed it was adopting last month.

The asset manager is reducing its AMC 10bps from its previous 0.75 per cent charge, while a sliding performance fee will move 20bps either side of that figure, according to out- or underperformance.

Fidelity held around 500 conversations with clients, regulators, and others in the industry to flesh out the details.

“We’ve got a number of clients who were extremely positive and very excited about the disruption, we’ve got a minority of clients who weren’t interested, and the vast majority of clients who wanted to see more details around it,” says Fidelity CIO for equities Europe Paras Anand.

The new variable fees model will apply to 10 equity funds, but Fidelity says it plans to ultimately roll the model out across its equity range. It is also speaking to clients with segregated mandates and investment trust boards about adopting the model.

All funds in the first tranche to adopt the new variable management fee model will retain their independently-audited benchmarks. Fidelity notes equity funds that use customised benchmarks may have to move to an independently audited system when the fee structure is rolled out further.

First group of funds to adopt Fidelity’s model

Oeics Sicavs
Fidelity Special Situations Fund Fidelity Funds America
Fidelity European Fund Fund Fidelity Funds Emerging Markets Focus
Fidelity Asian Dividend Fund Fidelity Funds European Growth
Fidelity Global Special Situations Fund Fidelity Funds European Larger
Fidelity American Fund Fidelity Funds World


Anand defends the 20bps outperformance ceiling in the new model, saying it is a “material” deviation from the benchmark when considered over a rolling three-year period net of fees.

“If you only achieve index performance in this model gross of fees you’re going to end up at or around the bottom end of that range. You’re going to end up around 45bps because the return is net of all the charges over the rolling three-year period,” says Anand.

Funds will have to achieve benchmark performance net of fees to charge at the neutral rate of 0.65 per cent.

Anand denies the rise of passives has driven the move and says the one of the biggest risks for the industry is a race to the bottom for active fees. “The consequence over time will be an inferior service for customers.”

Instead, Anand says the new fee will incentivise clients to remain with active management for the long-term. “Even some of the very strongest fund have phases of underperformance.”

He says Fidelity’s private-ownership structure lets the group take a long-term view. The asset manager wants to model the success of a similar model used by its US parent company, Anand says, but he notes the details of the final variable fee model differ.

Anand says there are around $470bn in the funds in the US that use the model. “If we look at the experience of the funds in the US then we’ve seen them garner significant assets.”

The equities CIO admits the changes will impact the way investors evaluate funds. “It doesn’t fit neatly into a spreadsheet of how you analyse funds that are priced in the same way today. We would say that’s the nature of being disruptive and innovative and changing pricing structures.”