The Financial Conduct Authority’s value for money assessments requirements are expected to deliver a £25bn shake-up of the remaining UK-domiciled funds that continue to charge a performance fee on top of their annual management charge.
Columbia Threadneedle revealed on Monday that the last remaining funds in its Oeic range had dropped their 20% performance fees effective from 1 January. The move affected £660m worth of funds, all of which took a long/short approach.
But £24.5bn of UK-domiciled funds continue to offer the charging structure, according to Morningstar data.
“I wouldn’t be surprised if you found that by the end of next year a lot of these funds would have dumped these performance fees,” says GBI2 managing director Graham Bentley. “And wouldn’t it just be coincidental that this is within the first 12 months where they’re having to dish out value assessments.”
Performance fees are fine in principle if they have a significant hurdle rate and if the expertise of the fund manager is not already accounted for in the AMC, says Bentley, echoing the sentiment of several investors Portfolio Adviser spoke with. But he points out most performance fees are additional to a typical AMC rate of around 0.75%.
Value for money shines a spotlight on performance fees
Columbia Threadneedle emphasised its ditching of performance fees sought to provide the best value possible for clients but denied the change was “directly connected” to the Financial Conduct Authority’s value for money assessments.
From 30 January, authorised fund managers must include a value for money assessment in their annual reports as part of several fund governance changes to come out of the FCA’s asset management market study.
AJ Bell head of active portfolios Ryan Hughes expected value for money assessments could force fund groups to “think long and hard” about the appropriateness of performance fees.
The £3.3bn JOHCM UK Equity Income and £1.9bn JOHCM UK Dynamic funds are the largest UK-domiciled funds to currently charge a traditional performance fee, both of which have a 0.75% AMC and charge 15% on excess return. That is followed by the £1.6bn Janus Henderson Absolute Return fund, which has a 1% AMC and a 20% performance fee.
J O Hambro Capital Management is due to publish its value for money assessments in their relevant umbrella fund annual report and financial statements in March. “Where applicable, the performance fees levied will be considered as part of the overall assessment of value for money for fundholders,” a spokesperson said.
Absolute return accounts for half of assets charging performance fees
Of the 59 UK-domiciled funds that charge performance fees, 48 sit within an Investment Association sector and 16 are in the IA Targeted Absolute Return sector, which represents £4.5bn of investor money.
Absolute return funds with performance fees
| Fund | Morningstar category | AUM | Performance fee (%) |
| Man GLG UK Absolute Value | EAA Fund Alt – Long/Short Equity – UK | £412.9m | 20.00 |
| Schroder UK Dynamic Absolute Return | EAA Fund Alt – Long/Short Equity – UK | £400.5m | 20.00 |
| Janus Henderson UK Absolute Return | EAA Fund Alt – Long/Short Equity – UK | £1.6bn | 20.00 |
| LF Odey Absolute Return | EAA Fund Alt – Multistrategy | £591.8m | 20.00 |
| Blackrock European Absolute Alpha | EAA Fund Alt – Market Neutral – Equity | £232.2m | 20.00 |
| Artemis Pan-European Absolute Return | EAA Fund Alt – Long/Short Equity – Europe | £17.9m | 20.00 |
| Janus Henderson European Absolute Return | EAA Fund Alt – Long/Short Equity – Europe | £32.3m | 20.00 |
| Blackrock UK Absolute Alpha | EAA Fund Alt – Long/Short Equity – UK | £249.3m | 20.00 |
| Artemis US Absolute Return | EAA Fund Alt – Long/Short Equity – US | £501.4m | 20.00 |
| Blackrock Emerging Markets Absolute Alpha | EAA Fund Alt – Long/Short Equity – Other | £6.3m | 20.00 |
| Schroder European Equity Absolute Return | EAA Fund Alt – Market Neutral – Equity | £21.5m | 20.00 |
| FP Argonaut Absolute Return | EAA Fund Alt – Long/Short Equity – Europe | £17.2m | 20.00 |
| WAY Absolute Return Portfolio | EAA Fund Alt – Multistrategy | £9.5m | 20.00 |
| TM Euro Select | EAA Fund Alt – Long/Short Equity – Europe | £741.7m | 15.00 |
| TM UK Select | EAA Fund Alt – Long/Short Equity – UK | £2.2m | 15.00 |
| Absolute Insight | EAA Fund Alt – Multistrategy | £409.2m | 10.00 |
Source: Morningstar
Hughes describes the prevalence of the fee structure in the sector as a product of history.
“If we go back a decade to the financial crisis, certain funds were offering the ability to generate positive returns when markets were collapsing and therefore, people were prepared to pay a premium price for that differentiated return,” Hughes says.
But the track record of the sector shows the charging structure is not fit for purpose, he says.
“If your capacity is a billion, and you’ve got an AMC of 75bps, your revenue from that strategy is already pretty good without earning another 20% on excess performance, particularly when so many of these funds are based on Libor.”
Willis Owen head of personal investing Adrian Lowcock describes the high number of absolute return funds with performance fees as “an example of where competition hasn’t been very effective”. “If the whole value for money requirement leads to the end of performance fees being charged then the whole thing will be worth it,” says Lowcock.
Equity and bond funds with performance fees ‘stick out like a sore thumb’
A performance fee in sectors outside Target Absolute Return “stands out like a sore thumb”, reckons Hughes.
Another JOHCM fund, UK Opportunities, which has assets under management of £401.1m, is one of three funds in the IA Specialist sector to charge a performance fee with the Jupiter International Financials and ES Gold and Precious Metals fund also employing the fee structure.
Eight funds feature in UK equity sectors, although two of these – Allianz UK Mid Cap and Fidelity Special Situations – come from fund houses that employ a fulcrum-type fee that ends up cheaper for investors when a fund underperforms. The Threadneedle UK Extended Alpha had also charged performance fees until 1 January.
The £478.5m Liontrust Monthly Bond Income fund, co-managed by Stuart Steven and Kenny Watson, is the only UK-domiciled fixed income fund to charge a performance fee, according to Morningstar data, although this is optional via the institutional P share class, which has an AMC of 0.20%.
Some performance fees work in investors’ interests
Not all performance fees are bad, says Lowcock. “Arguably they are closer linked to value for money albeit only in a performance context. The issue with performance fees has always been they were charged over and above the standard fees which given these were a percentage rate are also a form of performance fees.”
He points to Orbis, which has no base fee and is therefore cheaper than a tracker if it delivers market returns or less, as an example of a performance fee that is better aligned with investors.
Orbis Investments director Dan Brocklebank says this structure would be easier to justify in value for money assessments than a traditional performance fee charged on top of an AMC. Brocklebank says there is a trend among institutional investors towards performance fees with the £1trn Japanese Government Pension Fund adopting this approach for active managers in 2018.
The performance fee share class on the Liontrust Monthly Bond Income fund currently accounts for 45% of investors in the fund.
But Athena Consulting director and fund director Adrian Jones reckons the charging structure is less appropriate for most retail funds. “I don’t think that performance fees work in daily dealing funds as the performance fee is calculated at the fund level rather than the individual investor level which means that there could be very different results from what an investor expected.”
Jones is not opposed to the charging structure if the benchmark is appropriate and the AMC is low.
In 2017, Fidelity International unveiled its variable management fee, which returns fees to investors during periods of underperformance.
Mifid II filings from the asset manager show the £95.8m Asian Dividend and £936.6m American funds currently have performance fees of -0.14% and -0.20% respectively. The AMC on the variable management fee share classes of both funds is 0.65%, 10 basis points cheaper than equivalent share classes without the performance fee.
AllianzGI has adopted a lower base fee across five funds available to UK retail investors, ranging from 0.20% to 0.30%, that it combines with a performance fee.
