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Funds with performance fees under fire

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Funds that charge performance fees have come in for criticism after it has emerged they are failing to beat trackers and underperform funds without performance fees.

The Financial Times reports research from Architas which found out of 121 UK funds with performance fees, 97 per cent failed to beat a passive fund tracking the MSCI World index over three years.

The research spanned equity, absolute return and property funds.

Separate analysis by the FT of Morningstar data found the largest European funds with performance fees underperformed those without over one, three and five years.

Architas investment director Adrian Lowcock says: “The presence of a performance fee can convince retail investors they are buying into something or someone special, who will do better because the manager’s motives are aligned with theirs. In reality, nothing outstanding happens.”

Hargreaves Lansdown head of research Mark Dampier says: “In a year the fund performs well, you could find yourself paying 4 per cent to 5 per cent in total charges.

“If the next year is bad and the manager loses your money, you don’t get back what you paid him in the good year. There is no alignment of interests here. It is simply lining of pockets.”

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  1. Performance fees are acceptable only if they’re balanced with under-performance rebates.

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