View more on these topics

Performance freeze

Chris Salih looks at the response to a call to shun funds with performance fees

Hargreaves Lansdown chief executive Peter Hargreaves reignited the performance fee debate by calling for advisers to boycott funds which use them, apart from in exceptional circumstances.

He beleives that fewer than a dozen managers warrant the fees and that those managers who perform badly should be penalised.

Hargreaves says there are two types of performance fee which he feels are particularly unfair on the investor. The first is the use of a hurdle rate which is easy to beat.

He says: “For instance, several unit trusts have a performance hurdle to beat Libor which is currently 0.73 per cent one month, 0.57 per cent three months.”

Hargreaves says the second type of unfair hurdle rate is those based on a short period.

He says: “In other words, if the fund outperforms for three months, the fund manager can take his money out after three months. If you look at how markets move, there is every chance that over a short period of time he will outperform whereas he should only benefit over a long period of time, otherwise the money will leave the fund and there will be less money in the fund to achieve results for the client.”

The introduction of performance fees in the retail fund market largely began in 2004 when the FSA lifted a ban on the use of these charges within open-ended portfolios. This meant UK managers could compete on equal terms with European managers. Before this, onshore unit trusts and Oeics could only imitate a performance fee by reducing their management charges. The fees have become more prevalent with the introduction of long/short absolute return funds acting as a catalyst.

A Skandia Investment Group survey of fund firms last year showed two-thirds expect the use of performance fees to increase.

Schroders head of UK intermediary business Robin Stoakley says: “Performance fees offer a good incentive to managers to add value. There is nothing wrong with them as long as they have a sensible and realistic calculation and a relevant benchmark.”

Whitechurch Securities managing director Gavin Haynes says his firm is careful in recommending funds which have performance fees, but would not go as far as to boycott them.

He says: “Sometimes they are a necessary evil to get access to some of the top-performing fund managers. If they are in place, then the annual management fee should be reduced.

“You would expect them to grow, given that this has come largely out of the hedge fund area and with absolute return funds – which are effectively retail versions of hedge funds – growing in popularity that performance fee culture is likely to grow. We do not want to see them applied to standard UK funds, which are not at the sophisticated end of the market.”

Cazenove head of UK retail Rob Thorpe agrees with Hargreaves to an extent but says performance fees are useful to attract talent in the industry.

He says: “These managers will want a similar remuneration package to the one in the hedge fund space, where performance fees are the norm.”

Hargreaves Lansdown currently has 14 funds with a performance fee within its Wealth 150 but it says that in the future it will be far stricter on adding and retaining those funds in the list.


Leeds BS profits leap

Leeds Building Society reported a 10 per cent increase in profits for the first half of 2010 to £18m from £16.3m in 2009.

Altmann wants a total rethink

Independent pension analyst Dr Ros Altmann says a total rethink is needed on the approach to retirement and retirement saving in order to restore fairness to the system and reinvigorate pension savings. Speaking at the Money Marketing Retirement Planning Summit in Dublin, she said tinkering with the pension system would not be sufficient to correct […]

LVAM appoints head of sales

LV= Asset Management has appointed Matthew Wright as head of sales. Wright joins from Fidelity International, where he was head of discretionary business. He will report to Ann Roughead, managing director at LVAM. LV= says Wright is planning to hire further members to his six-strong team, which currently includes three regional sales managers, a national […]

‘Switch from DB before CPI move’

Pension experts are recommending people who plan to transfer out of final-salary schemes to make the move while valuations are still being calculated using the retail price index, which is generally more generous. Last month, the Government announced that private sector pension schemes could link increases to the consumer prices index rather than RPI in […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm