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The fees of the future

Fund management fees are changing, but do the changes go far enough?

  • Fidelity’s new charging model incorporates a performance fee structure
  • It is one of a raft of changes to fees from the large active management groups
  • However, no fund manager has yet addressed the limitations of the percentage fee model

Fidelity this week announced a new charging model across all its active equity funds, introducing a variable management fee option, that will depend on its performance relative to a benchmark. It is, it said, its response to the growing debate on the value of active management.

Fidelity’s move comes hot on the heels of the announcement by Baillie Gifford that it has cut the annual management charges by up to 10 basis points across its UK Oeics and Irish Ucits funds, with a number of funds dropping from 0.65% to 0.55%.

These moves are likely to become increasingly commonplace as managers reassess their position in light of the threat from passive investors. Fidelity’s new fee structure means that when a fund delivers outperformance net of fees, Fidelity will share the upside. If it underperforms investors will pay lower fees.

However, these changes, while welcome, only go part way to addressing the most vulnerable part of a fund manager’s fee structure – i.e. that fund managers are incentivised to grow assets under management, which can run contrary to the clients’ interests. In a percentage fee structure, it makes sense to grow assets as much as possible – the costs, for the most part, are fixed and therefore any asset growth is pure profit. However, there is an increasing realisation that large funds do not serve the interests of investors particularly well.

At the recent Active Investment Conference Jupiter’s Edward Bonham-Carter admitted that large funds could suffer performance problems. Certainly there are a number of high profile examples where a previously exceptional fund manager has seen performance tail off when their funds have reached a certain size. As such, this incentive to grow funds larger and larger is a problem that needs to be addressed.

As yet, none of the larger fund management groups have hinted that they would change the percentage fee model. There are some noble examples of fund groups bringing in caps on the size of their funds. The investment trust sector too, has shown more innovation. The City of London investment trust, for example, discounts its fees as the trust grows over a certain point and, at 0.42%, they are competitive with passive vehicles.

Either way, fund management groups that refuse to rethink the way they charge fees may find themselves in a dwindling minority. These are difficult times for active management, and those fund groups that prove the most adaptive are likely to be those that thrive.

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