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Guns loaded against performance fees

Hargreaves Lansdown chief executive Peter Hargreaves says his firm will fight hard against performance fees as he pours scorn on the results of an AITC survey.

Well, all I can say is that the people carrying out the survey were clearly well briefed in what results the AITC would be prepared to pay for.

I have no doubt in my mind that the results of this survey were gleaned from totally biased and loaded questions.

I challenge the AITC to send me the actual questions asked in this survey.

In the mainstream world of open-ended funds, the biggest reward that the manager gets for good performance is the extra management charge on the huge influx of funds that good performance attracts. That should be all the incentive that a manager needs for good performance.

The problem is that investment trusts are closed-end vehicles. Good performance does not attract new money although exceptional performance could result in a rights issue which would have that effect.

The other benefit that the investment trust manager receives is retaining the mandate. Sadly, many boards of investment trusts are the managers’ poodles and never replace them for poor performance.

I personally have never seen a performance fee that benefits other than the fund management group. Of course, if you ask loaded questions to investors, you might get the answer you are seeking but if investors are shown the facts and informed accurately of what performance fees mean, they will unanimously vote no.

Performance fees are just far too open to abuse. First of all, a huge worry of mine is that an underperforming manager will take unnecessary risks to earn his performance fee.

I also wonder what yardsticks they will create to ensure it is a one-way bet. Bedlam, for instance, has no benchmark whatsoever. If gets its performance fee if the market goes up, even if it underperforms every other fund in its sector. It could just buy the index (it would probably do better if it did).

I hear comforting words that many of the intended performance fees will have what is known as a high watermark arrangement.

In other words, the performance fees will never be paid if after a period of poor performance they do not reach the point on the yardstick from which the performance fees commence. All very creditable.

I have, however, yet to see the only honest, fair and true way of paying performance fees. If a fund manager writes into his contract that he gets more if he beats a particular yardstick, then surely it can only be fair that if he does not beat that yardstick, he puts money in.

Being only in a position where you can take more out and never suffer if you underperform is tantamount to having your cake and eating it.

Could I implore members of the investment broking fraternity to express violently, succinctly, forcibly and poignantly their disagreement with performance fees, especially the ones that only benefit the investment managers – which means all of them.

At Hargreaves Lansdown, we will fight hard against performance fees. We hope we can engender support to totally reject these very unfair fees. Could I also implore you not to be seduced into coercion by accenting the bribe of sharing in those verv unfair fees levied to the detriment of your clients.


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