Despite selling the idea of a performance-based variable fee for 10 of its equity funds as “innovative” on Wednesday, Fidelity’s plan to link fees to how much a fund underperforms or outperforms was met with scepticism from the wider industry.
The over-complicated nature of reducing or increasing the annual management charge on a fund by 0.2% depending on its performance relative to the index was subject of some of the criticism.
Architas investment director Adrian Lowcock applauded the attempt to do something different, but said: “Trying to explain the performance fee to investors will take a lot of time and effort and there is a risk of greater misunderstanding.”
Fidelity, which admitted it would take on a lot of “revenue risk” when introducing the variable fee next March, said it hoped other fund houses would copy the structure in order to align themselves better with clients.
However, Laith Khalaf, a senior analyst at Hargreaves Lansdown, warned against other fund firms taking on the structure, saying it would “make life extremely difficult for UK investors”.
“Investors will understandably find it very hard to get their heads around the new charging structure, and it will be challenging to compare the potential cost of these new share classes with the current share classes, and indeed with competitor funds charging a more traditional fixed percentage charge,” Khalaf said.
“We think investors would prefer to know what they are paying as a simple annual charge, rather than having to resort to a spreadsheet to model the possibilities.”
Variable management fee
Under the new fee structure, investors would pay an annual management charge of 0.65% for an actively-managed equity fund, with the fee rising as high as 0.85% when it performed well and dropping to 0.45% when it performed poorly.
It is the lower fee that Khalaf took issue with, asking why an investor would pay 0.45% for a fund that was doing little more than track an index or worse.
“Investors choosing active funds, including ourselves, expect outperformance from the fixed percentage fees they already pay.
“No-one wants to invest in an underperforming active fund, no matter how cheap it is,” Khalaf said.
“To that end, investors will naturally question why they should pay 0.45% for significant underperformance, when they can pick up an index tracker for as little as 0.06%. They will also question why they should pay more for outperformance, when that is what they expect as standard from an active fund manager.”
Lowcock was similarly disparaging of the fee level, though he approved of the fee being calculated on a longer-term three-year rolling basis, saying he did not expect fund groups to be “paid twice for doing their job reasonably well”.
“[The change] means investors are effectively paying 0.65% if the manager simply tracks the index. That is expensive when compared to passive funds,” he said. “When buying an active manager I expect them to outperform an index and that is why I pay a much higher fee.”
