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Chris Salih looks at the trend for some fund firms to raise annual charges, claiming performance justifies higher fees

First State Investments has reignited the debate about fees in setting out plans to raise the annual charges on its £877m Asia Pacific and £183m Greater China opportunities funds from 1.5 to 1.75 per cent.

The increases would bring in an extra £2.65m a year, with the rationale behind the move that strong-performing funds with limited capacity have the right to charge a premium.

Chief executive Charlie Metcalfe says: “We feel it is appropriate charging a premium fee on highquality funds that have limited capacity.”

The performance part is borne out, with the Asia Pacific fund, run by emerging markets guru Angus Tulloch, building a big adviser following with annualised returns of 15.54 per cent since launch in 1988.

That vehicle is now soft-closed, but the Greater China fund, which is managed by Martin Lau and Ho Hsiu Mei, is open to new investment and has produced annualised returns of 28.61 per cent since launch in December 2003.

BestInvest head of communications Justin Modray says the performance does not justify an increase in fees, regardless of capacity issues.

He says: “I suppose it comes down to the fact that the group has the right and the confidence to put these new fees in place. A good example of another firm that did this was Invesco Perpetual, which raised the charges on Neil Woodford’s income and high-income vehicles back in 2004, only for assets under management to balloon in size.”

Invesco Perpetual raised the annual charge from 1.25 to 1.5 per cent in what were then its £3bn highincome and £1.2bn income funds. At the time, the new charges were set to generate £12.5m more in fees in those vehicles. The high-income fund now stands at a massive £8.8b, while the income fund holds £6bn.

Perhaps the most recent example of a fund manage-ment business raising charges is Old Mutual, which increased the AMC on its UK select smaller companies fund from 1.5 to 1.75 per cent after making the £592m fund a limited issue offering.

Modray says: “We commend groups which close funds to new investment if they believe further growth will be detrimental to performance but they need to continue to perform to justify any additional charge.”

One line that seems to be prevalent is that the move is not just performance-based but to keep pricing in line with market averages, with almost 40 fund firms now charging 1.75 per cent for at least one fund in their range.

Premier has nine funds that have an AMC of 1.75 per cent. Earlier this year, the company’s chief investment officer Richard Muckart defended the move by claiming that 1.5 per cent is history for a lot of fund firms.

Hargreaves Lansdown head of research Mark Dampier disagrees and believes that greed has brought the market to this point. He says: “The trouble is that if 40-odd fund firms have decided to move certain funds to 1.75 per cent for some reason or other, then naturally managers are going to look at that and say they want a piece of that pie.

“But managers are also wrecking their own perfor-mance because there is not that great a difference between being first or third quartile and that perfor-mance can easily be eaten away by performance fees taking the guts out of added performance returns. If they go to 1.75 per cent, what is to stop a migration to 2 per cent?”

In addition to outperf-ormance, another argu-ment that firms tend to use when raising fund charges or launching a fund with higher fees is that the product is specialist and the effort to produce returns warrants a charge above market neutral.

Resolution Asset Management director Jonathan Polin says the firm’s Argonaut European alpha fund is fairly valued, given its specialist qualities.

He says: “Charging 1.75 per cent for a high-alpha product that is performing is absolutely fine as the capacity tends to be limited but to use it for a bogstandard UK product is not right.”

Chelsea Financial Services managing director Darius McDermott says he has no problem so long as the vehicle consistently outperforms.

He says: “I have no objection in principle to what these groups are all doing, provided they perform. If it is a premium manager with consistent top-quartile performance, like Neil Woodford, then no one can really argue. My issue comes in when a charge is raised but the performance is not there subsequently to back it up.”

McDermott believes that firms could introduce an outperformance fee that is set around 10 per cent above the benchmark, warranting extra reward, regardless of whether they are specialist or not.

He says: “Distribution is growing on a wider scale, with funds being offered more readily in the likes of banks. So, if they are big performers, the size of the fund is likely to swell much faster and therefore charging that fee is reasonable, but if a fund does struggle after that fee is introduced, why shouldn’t that firm be compelled to lower its charge again?”

Credit Suisse’s income range is one example of a firm which has struggled after increasing performance fees in 2005. Modray says this was a liberty, considering the fund was not exactly performing at its peak at the time either and it has contributed to the outflows of assets these vehicles have seen.

Modray adds: “If firms are to raise these fees, they have to be certain of themselves as investors can always vote with their feet if performance fails to back up the move.”


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