Question
I recently decided to switch ( a small amount) out of Anthony Boulton's China Investment Trust (Fidelity China Special Situations ) and was looking for a replacemement investment vehicle . I already had some Melchior Asian Opportunities and decided to look at that as a possibility for a small additional investment. I checked Hargreaves Lansdown's latest isssue of their Investment Times (IT85) as I remembered that had a list of the funds that had been moved out of the Wealth 150 to a separate subsection of the Wealth 150 entitled "Funds with performance fees" : and it listed about 11 funds including the Melchior ST European Absolute Return as having been removed for this reason. Of course , it was easy to assume , as I did at first , that it was a more comprehensive list including all funds with fees.When I realised that it was not a comprehensive list (as Wealth 150 only) I checked the Key Features of the Melchior Asian Opportunities and found that it DID charge performance fees. I will try to purge my portfolio of any funds groups that charge fees (but a few have sneaked past me !!) but I will not sell the Melchior immediately: the dilemma will come with funds that have done quite well !!
The other fund groups listed by Hargreaves Lansdown's Investment Times include Blackrock , Cazenove , Ignis , Investec , JO Hambro , Jupiter , Liontrust , Old Mutual , Sarasin: but of course these are only the ones previously in the Wealth 150 and now in their own subsection.
I am not sure about Aberdeen . Do any any other fund groups charge performance fees?
Is it best to assume (with my strategy) that if a fund group attaches fees to ONE of its funds it is likely to do so on the rest possibly discretely and serreptitiously possibly in a way that will not be noticed.(ie Will I need to purge from my portfolio any funds in that WHOLE fund group even those that do not currently have fees : ie TAKE A VIEW of their likely future orientation in this area and invest accordingly ? ) .One of the unpleasant things about investment fees it that it appears they can be added after the initial investment has been made (Am I right about that?)So should investment in relation to fees (and the likelihood of them being serreptitiously introduced) be looked at at FUND GROUP level or at INDIVIDUAL FUND level?
I hope this makes sense.Answer
In theory I'm a big fan of performance fees because they should firmly align a fund manager's financial interests with those of investors'. But in practice I mostly hate them because fund managers are so greedy in the way they're implemented.
In my simple world a fund manager charging 1.5% a year (from which they keep around half, the rest is paid as commission and platform fees) should cut their basic fee to about 1% and then earn a performance fee on top of this if they outperform a comparable index. The level of performance fee should be such that they can collect the original 1.5% with modest outperformance and perhaps earn up to 2% or more a year if they excel. This means the manager can earn more than usual by performing well and just about keep their heads above water when underperforming (it's not really in our interests to see them go bust).
In practice the performance fees we've seen introduced to date are a joke. The manager keeps the standard 1.5% annual fee then adds a performance fee on top - i.e. there's no risk sharing on the manager's part. If they perform badly they still collect the usual 1.5% and if they perform well they pocket a lot more than this.
Worse still, some performance fees apply to any positive returns rather than just those above a benchmark index (called a 'hurdle'), so the manager could stick his fund in a savings account and still collect higher than usual fees. For example, Cazenove Absolute UK Dynamic charges 1.5% and 20% of any returns above the fund's previous highest price - it really is daylight robbery.
Why do some fund groups adopt such greedy practices? Simple, because they are greedy and generally get away with it!
The majority of funds that charge performance fees are absolute return. I think this stems from the hedge fund world, where managers are especially greedy and hefty performance fees are commonplace. Absolute return funds are effectively a type of hedge fund so their managers have mostly added performance fees and argued 'it's the norm for this type of fund'.
So where does this leave us as investors?
While I don't like hefty performance fees like those outlined above (that are a win/win for the fund manager) I concede they're probably worth paying if the manager consistently performs well. Not ideal, but if it's a case of using manager A who's really talented but expensive or manager B who's cheap but performs poorly, I'd obviously plump for the former every time if I think I'll end up with a higher return net of charges.
The trouble is, managers seldom always perform well, especially when it comes to absolute return funds. So even with a supposedly good manager you could still end up paying high fees for lacklustre performance at times (especially if the performance fees don't have a challenging hurdle).
However, where a fund group charges performance fees on its absolute return fund(s) I wouldn't lose sleep over the possibility of this spreading to their other funds. While I daresay it'll happen to an extent in future, I don't think it'll become commonplace.
I would love to say let's all avoid fund groups charging greedy performance fees with a view to encouraging them into giving customers a fairer deal. But being realistic it won't happen, after all there's still over £1 billion of money invested in the Virgin Tracker Fund which, at 1% a year, is more than 3 times more expensive than the cheapest comparable trackers on the market. Most investors are lethargic when it comes to transferring funds.
So in practice I'd avoid such funds where practical (i.e. good non-performance fee alternatives exist) but bite the bullet where you feel potential performance justifies paying high potential management fees. And let's hope there's a fund group out there that has sufficient nerve (and morals) to introduce a fair performance fee along the lines of my earlier proposal - giving the market a much needed shake-up.
I recently decided to switch ( a small amount) out of Anthony Boulton's China Investment Trust (Fidelity China Special Situations ) and was looking for a replacemement investment vehicle . I already had some Melchior Asian Opportunities and decided to look at that as a possibility for a small additional investment. I checked Hargreaves Lansdown's latest isssue of their Investment Times (IT85) as I remembered that had a list of the funds that had been moved out of the Wealth 150 to a separate subsection of the Wealth 150 entitled "Funds with performance fees" : and it listed about 11 funds including the Melchior ST European Absolute Return as having been removed for this reason. Of course , it was easy to assume , as I did at first , that it was a more comprehensive list including all funds with fees.When I realised that it was not a comprehensive list (as Wealth 150 only) I checked the Key Features of the Melchior Asian Opportunities and found that it DID charge performance fees. I will try to purge my portfolio of any funds groups that charge fees (but a few have sneaked past me !!) but I will not sell the Melchior immediately: the dilemma will come with funds that have done quite well !!
The other fund groups listed by Hargreaves Lansdown's Investment Times include Blackrock , Cazenove , Ignis , Investec , JO Hambro , Jupiter , Liontrust , Old Mutual , Sarasin: but of course these are only the ones previously in the Wealth 150 and now in their own subsection.
I am not sure about Aberdeen . Do any any other fund groups charge performance fees?
Is it best to assume (with my strategy) that if a fund group attaches fees to ONE of its funds it is likely to do so on the rest possibly discretely and serreptitiously possibly in a way that will not be noticed.(ie Will I need to purge from my portfolio any funds in that WHOLE fund group even those that do not currently have fees : ie TAKE A VIEW of their likely future orientation in this area and invest accordingly ? ) .One of the unpleasant things about investment fees it that it appears they can be added after the initial investment has been made (Am I right about that?)So should investment in relation to fees (and the likelihood of them being serreptitiously introduced) be looked at at FUND GROUP level or at INDIVIDUAL FUND level?
I hope this makes sense.Answer
In theory I'm a big fan of performance fees because they should firmly align a fund manager's financial interests with those of investors'. But in practice I mostly hate them because fund managers are so greedy in the way they're implemented.
In my simple world a fund manager charging 1.5% a year (from which they keep around half, the rest is paid as commission and platform fees) should cut their basic fee to about 1% and then earn a performance fee on top of this if they outperform a comparable index. The level of performance fee should be such that they can collect the original 1.5% with modest outperformance and perhaps earn up to 2% or more a year if they excel. This means the manager can earn more than usual by performing well and just about keep their heads above water when underperforming (it's not really in our interests to see them go bust).
In practice the performance fees we've seen introduced to date are a joke. The manager keeps the standard 1.5% annual fee then adds a performance fee on top - i.e. there's no risk sharing on the manager's part. If they perform badly they still collect the usual 1.5% and if they perform well they pocket a lot more than this.
Worse still, some performance fees apply to any positive returns rather than just those above a benchmark index (called a 'hurdle'), so the manager could stick his fund in a savings account and still collect higher than usual fees. For example, Cazenove Absolute UK Dynamic charges 1.5% and 20% of any returns above the fund's previous highest price - it really is daylight robbery.
Why do some fund groups adopt such greedy practices? Simple, because they are greedy and generally get away with it!
The majority of funds that charge performance fees are absolute return. I think this stems from the hedge fund world, where managers are especially greedy and hefty performance fees are commonplace. Absolute return funds are effectively a type of hedge fund so their managers have mostly added performance fees and argued 'it's the norm for this type of fund'.
So where does this leave us as investors?
While I don't like hefty performance fees like those outlined above (that are a win/win for the fund manager) I concede they're probably worth paying if the manager consistently performs well. Not ideal, but if it's a case of using manager A who's really talented but expensive or manager B who's cheap but performs poorly, I'd obviously plump for the former every time if I think I'll end up with a higher return net of charges.
The trouble is, managers seldom always perform well, especially when it comes to absolute return funds. So even with a supposedly good manager you could still end up paying high fees for lacklustre performance at times (especially if the performance fees don't have a challenging hurdle).
However, where a fund group charges performance fees on its absolute return fund(s) I wouldn't lose sleep over the possibility of this spreading to their other funds. While I daresay it'll happen to an extent in future, I don't think it'll become commonplace.
I would love to say let's all avoid fund groups charging greedy performance fees with a view to encouraging them into giving customers a fairer deal. But being realistic it won't happen, after all there's still over £1 billion of money invested in the Virgin Tracker Fund which, at 1% a year, is more than 3 times more expensive than the cheapest comparable trackers on the market. Most investors are lethargic when it comes to transferring funds.
So in practice I'd avoid such funds where practical (i.e. good non-performance fee alternatives exist) but bite the bullet where you feel potential performance justifies paying high potential management fees. And let's hope there's a fund group out there that has sufficient nerve (and morals) to introduce a fair performance fee along the lines of my earlier proposal - giving the market a much needed shake-up.
Read this Q and A at http://www.candidmoney.com/questions/question499.aspx
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