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Delays on the feeway

But many investment companies say they would not replace annual management charges with performance fees as a trade-off for access to multi-ties.

With the date for depolarisation now set, debate has grown over what will be the best way for fund firms to get on multi-tie panels.

An increasing number of asset managers are doing research into the relative costs of performance fees and AMCs so it seems likely that more funds will make the transition.

It is a tough choice to make, especially for smaller firms. If half of the market is likely to multi-tie, then not being on a panel could mean that access to half of the existing distribution market could disappear.

As a result, fund managers could find themselves having to make their prices increasingly competitive to the panels. One way to do this could be by only charging performance fees.

Under the old regime, only offshore funds were allowed to charge performance related fees.

Bedlam Asset Management in 2001 pledged not to charge a management fee to investors if, in a given quarter, an investor did not receive a total return of 1.25 per cent or the value of the fund declined. If the fund manager delivered however, Bedlam charged up to 1.4 per cent.

Whatever the future held for Bedlam, it assured its profile in the fund management industry by putting performance fees back on the map.

All this changed again when the FSA updated its rulebook earlier this year and opened the door for performance fees to be charged.

Gartmore was one of the first UK fund management companies to break the standard AMC mould. On its range of focus funds it rebates the AMC according to the number of months that it fails to achieve top quartile performance. If the funds stay top quartile for 12 months Gartmore raises its fees to 2 per cent but if they do not appear in the top quartile the fee falls to 1.25 per cent.

Many IFAs applaud the use of performance fees as they put fund managers under pressure to make the grade but levels of fees are a bone of contention.

Some fund managers see a level of around 1.75 per cent, as fair if they beat the FTSE100 by 10 per cent in a quarter for example.

Investec Fund Managers joint managing director Andy Sowerby has suggested that managers are looking towards the hedge fund sector which has been remunerated on performance for some time.

He thinks the debate on performance fees is waiting to happen. The asset managers are studying their hands, waiting to see how their rivals perform before throwing their cards onto the table. He says: “I would not be surprised if a lot of firms are doing their research into what the effects of changing their charging structure would be – this could be the payoff for getting onto a multi-tie panel. The investment market is extremely competitive and firms have to look at their prices if they want to get an edge.”

But Hargreaves Lansdown senior investment analyst Meera Patel does not see why they would do this. She says: “What it is all going to come down to is what level the performance fee is. Investors are happy to pay a certain amount for outperformance, but it depends what that outperformance is. On the other hand, why should an investor pay an annual management charge if the funds manager is not making them any money. So the performance fee should go down if he underperforms. I can sort of see why a fund management company might think that a performance fee would make them more attractive to a multi-tie but they cannot really charge two rates on for intermediaries and one for multi-ties, can they?” Threadneedle offers performance fees on its UK and its pan-European accelerando funds. If the funds outperform their respective index by 2 per cent then a fee kicks in, after this the fund manager can take as much as 20 per cent of the outperformance.

Threadneedle product development director Mary Blair believes that performance fees cannot work on all funds – and that they are best ones where risk return is high. It is partly for this reason that she does not think multi-ties will be attracted by performance fees.

She says: “If companies want to make their charges attractive then I think that most people will want to try and go with a company that is going to have one that will give them a steady stream of income. We certainly do not believe that performance fees are appropriate for all funds and will certainly not be putting them on all funds. However, where there is a certain level of risk and fund managers need rewarding for that then it is appropriate for a performance fee to be charged.

“If you only charge performance fees then there is a danger that the fund manager will take a greater level of risk than you want him to just so that he gets paid more. That is not really acceptable.”

With the days ticking down to December 1 and the fight to get on multi-tie panels about to start raging, it seems that the debate over performance fees has only really just begun.


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