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iimia innovates with cash benchmark for performance fee

Fund manager iimia has introduced three funds of funds which it believes are the first FSA-authorised funds to base performance fees on a cash benchmark

The funds all invest in a combination of closed-ended funds and investment trusts as permitted by Ucits III legislation.

Before Ucits III was introduced, fund of funds managers had to decide whether to invest in open-ended funds or investment trusts.

In 2003 iimia chose the investment trust route for its CF immia accelerated fund. However, the best fund managers do not always run investment trusts and in some areas such as Japan, there are very few investment trusts to choose from. By including open-ended funds as well, iimias new funds of funds can access more talented managers with greater choice.

The income and growth fund, will be run by Richard Scott. He will be assisted by former Christows managers Nick Greenwood and Daniel Lockyer, who run the other two funds in the range.

In addition to a 1 per cent annual management charge, iimia will receive 15 per cent of any outperformance above the sterling three-month Libor plus 2 per cent. Most performance fees are linked to a funds performance relative to a benchmark index, but iimia says a cash benchmark is more appropriate when the objective is absolute returns.

Although the inclusion of investment trusts offers greater diversity, they will trade at a discount where the value of the investment trust itself is lower than the total net asset value of the underlying shares it invests it.

While this enables fund of fund managers to buy trusts cheaply before the discounts narrow, the opposite is also true. Discounts can widen, meaning the investment trust will fall in value and adds an element of risk to the fund of funds.

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