Fund managers who receive performance-related bonuses perform worse than those who do not, research suggests.
Analysis of 240 firms’ results between 2003 and 2007 by Grant Thornton found that, on average, funds without performance fees performed slightly better than those with them.
While performance fees in the sample beat their benchmarks 53% of the time, those without performance fees did so 59% of the time.
Grant Thornton says over 45% of what it calls “mainstream” investment firms have some form of performance fee for managers exceeding a benchmark or improving the net asset value of the company.
“Generally speaking, the introduction of performance fees does not in itself lead to an improvement in performance or to a material effect on the style of individual managers,” says Hugh Aldous, consultant at Grant Thornton.
In addition, the firm says the study shows there is little material benefit for shareholders in introducing performance fees.
It says boards of investment companies should be robust about the calibre of manager their shareholders expect them to employ. If a board is considering introducing a performance fee, it needs first to decide the purpose and to define what it and its shareholders mean by performance and against what objectives or benchmark.
“Performance fees can amount to quite a lot of money,” Aldous adds. “They deserve more attention from boards and they should periodically be the topic for boardroom analysis and review with independent professional advisers who understand the benefits, issues and different types of construction fees.”
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