Clawback proposed on performance fee deals

Groups using performance fees should include a clawback feature to reduce charges if the manager fails to achieve targeted returns, Lipper has proposed.

Research by the firm suggests such a move would help to ensure a fund’s charging structure is more than just a one-way bet for the company.

Overall, Lipper found two-thirds of the 81 open-ended funds in Britain that use performance fees can levy the charge for beating a falling index. (article continues below)

This means the group can take fees even if investors are losing money.

Ed Moisson, the head of consulting at Lipper FMI, says only a minority of groups using performance fees levy less than the standard 1.5% annual management charge. “The vast majority charge 1.5% or more, suggesting there is, in principle, no financial downside for companies implementing a performance fee structure,” he adds.

The research coincides with a rising debate on performance fees, with Peter Hargreaves, a ­co-founder of Hargreaves Lansdown, saying fewer than a dozen managers in Britain warrant them.

Lipper’s research shows the number of funds charging performance fees increased from 34 at the end of 2007 to 81. But this still represents less than 5% of the industry’s total number of funds.

“Fund firms should demonstrate they are doing more than just assuming a performance fee intrinsically aligns the interests of a manager and their investors,” says Moisson.