LONDON (Reuters) - Britain’s mutual funds are shunning a hedge fund-style method of charging clients, where investors pay fees as a proportion of outperformance by the fund manager, following a revolt by financial advisers selling the funds, a study has found.
Research by Lipper published on Monday shows that after initial enthusiasm for performance fees in 2007, the number of funds using the structure stands at 80, compared with 112 having charged the fees at one time.
In a 2007 study, Lipper found 34 funds had adopted performance fees, rising to 81 funds three years later.
The fact the number has not risen since 2010 “reflects not only a slowing of funds being launched with performance fees but also the closure of funds and the removal of performance fees,” Lipper said.
Lipper, a Thomson Reuters company that tracks the funds industry, blamed scepticism among financial advisers about arguments that performance fees align the interests of investors and the fund manager.
“I think (advisers’) scepticism mainly comes from the perceived misalignment of interests between fund managers and investors,” said Ed Moisson, head of UK and Cross Border Research at Lipper.
“In most cases if a fund manager does well he gets an extra fee, but if he does badly it’s only the investor that suffers.”
Performance fee charging structures are commonly used by the hedge fund industry, with funds typically charging 15 to 20 percent, or sometimes even more, of positive returns or outperformance of a benchmark. They will also typically charge an annual fee of 1.5 to 2 percent.
“The interesting twist to the findings in the current report is that expectations had been for the use of performance fees to rise,” Lipper said.
The research also found use of performance fees is not guaranteed to incentivise better investing by the managers running the funds.
Funds without performance fees generated positive returns for more of the time - 63.5 percent - than funds with the structure which outperformed 62.1 percent of the time, Lipper said.
David Smith, a fund manager at British investment firm Hargreaves Lansdown (HRGV.L), echoed the industry’s scepticism.
“There’s no evidence to support the argument performance fees lead to better performance. If managers can get you to pay them 20 percent they’ll take it and spend it but many of them aren’t earning it,” he said.
“There are exceptions but basically you should try and avoid paying it.” (Reporting by Chris Vellacott; editing by Laurence Fletcher and Mark Potter)