Two-thirds of the 81 open-ended funds in Britain with performance fees will levy the charge for beating a falling index, research from Lipper has revealed.
Meanwhile, the group’s findings also show that of the funds needing to outperform an index to earn their fee, fewer than one in four use a cash-benchmark such as the London interbank offered rate (Libor).
Ed Moisson, the head of consulting at Lipper FMI, says only a minority of groups using performance fees levy less than the typical 1.5% annual management charge.
“The vast majority charge 1.5% or more, suggesting there is, in principle, no financial downside for fund companies implementing a performance fee structure,” he adds.
“This is a good example of retail investors needing to be aware of what they might be letting themselves in for”
“While there may be cases where paying a performance fee relative to an index is acceptable (with no absolute condition), this is a good example of retail investors needing to be aware of what they might be letting themselves in for.”
Lipper’s research identified a 138% rise in the number of funds charging performance fees since the end of 2007, growing from 34 to 81.
This still represents less than 5% of the industry’s total number of funds.
Overall, the average performance fee charged is 18.2% and only four of the vehicles analysed have any sort of cap in place to limit the level paid out in any one year. (article continues below)
In a recent column written for Money Marketing, Fund Strategy’s sister publication, Peter Hargreaves, the co-founder of Hargreaves Lansdown, spoke out against performance fees, claiming less than a dozen managers in Britain warrant them.
He said that if managers benefit when they perform well, they should also be penalised if they perform badly.
Lipper’s guidelines on performance fees also include a proposition that fees should be reduced in the case of underperformance, so a fund’s charging structure is more than just a one-way bet for the company.
“Fund firms should demonstrate they are doing more than just assuming a performance fee intrinsically aligns the interests of a manager and their investors,” adds Moisson.