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Adviser Fund Index

The debate surrounding performance fees is set to become increasingly mainstream, according to research by Skandia Investment Group.

Skandia’s survey of fund firms running a combined £4.3trn in assets under management found that two-thirds of respondents expect the charges to become more prevalent on retail products – across equity, absolute return, fixed income and property funds.

Data from Lipper shows that many of the 25 performance-fee-charging open-ended funds unveiled since late-2007 have an absolute return mandate.

Recent launches include Gartmore UK absolute return and Liontrust European absolute return – which charge a fee of 20 per cent on performance above the Bank of England bank rate and the three-month London Interbank Offered Rate respectively.

The adviser fund index contains six port- folios which use performance fees: BlackRock UK absolute alpha, Cazenove UK absolute target, Gartmore European absolute return, JOHCM UK opportunities, Octopus absolute return and SVM global opportunities.

The BlackRock and Cazenove funds were particularly popular during the May rebalancing, receiving multiple selections across all three AFI indices.

However, some panellists remain to be convinced on performance fees. “I have never thought that such fees were appropriate for retail funds,” says Dennehy Weller managing director Brian Dennehy. “I want managers to focus on the job at hand and not worry about whether – over a relatively short period – they are hitting yet another benchmark. The manager could be driven to take on additional risk, and senior management might also encourage him to take on more risk, solely to try and hit short-term performance targets.”

Bentley Jennison Financial Management investment director David Wynn also sounds a note of caution. “My take on this is that inves- tors should thoroughly understand what a performance fee means – that includes stress-testing it or asking the manager for more information,” he explains. “As long as the fee is sensibly structured, it can ensure everyone’s interests are aligned. But, in certain circumstances, a manager could be motivated to increase the risk to increase the fee.”

Absolute return funds in particular use a wide range of charging structures. Wynn calls for an agreed methodology on performance fees, which would allow investors to compare products more easily.

“In principle, performance fees are the right way to go, but they need to be ultra-transparent,” says Wynn. “People need to understand the potential saving if a manager underperforms and the extra cost if he performs well.”

A report published by Lipper in April found that, of the 40 open-ended onshore portfolios charging performance-related fees, more than half charged 15 per cent (of net gains) as their base fee and just two charged 10 per cent. The remaining funds had performance fees of 20 per cent.

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