Restrictions on performance fees in the UK no longer serve a practical purpose and should be lift...
Restrictions on performance fees in the UK no longer serve a practical purpose and should be lifted, says Paul Moulton, chief executive of fund research company Fitzrovia International.
This is a key conclusion from Fitzrovia's analysis of performance fees for nearly 1,500 open-ended funds globally - the vast majority of which are open to retail investors.
Moulton said: "The basic concept of investors paying more for truly superior investment management can be described unequivocally as a fair one, provided the incentive fee is properly constructed and reflects 'real' index beating performance."
"The vast majority of managers of funds with performance fees have a potentially substantial upside if they perform well, but do not suffer an equivalent downside for under-performance. This is a 'heads I win, tails you lose' situation. Looking forwards, it may be fairer to compensate investors by way of a reduced annual management charge when introducing the performance fee structure."
UK based unit trusts and OEICs are prohibited from charging performance fees. But Fitzrovia highlights an inconsistency in that funds can operate a higher annual management charge which is partly rebated when they under-perform: "a performance fee in reverse," says Moulton.
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