Is the tide finally turning for fund fees?
New transparency rules to be introduced
Fund fees are a constant topic of debate. This month they have once again been thrust under the spotlight as the regulator sharpens its pencil on tackling performance fees.
This month they have once again been thrust under the spotlight as the regulator sharpens its pencil on tackling performance fees.
Meanwhile, the latest Spot the Dog report from Bestinvest revealed underperforming funds are estimated to be securing fund groups £537m in annual fees from investors.
Earlier this month, the Financial Conduct Authority (FCA) published new rules and guidance on disclosure for asset managers on the back of the 2017 Asset Management Market Study (AMMS).
The regulatory body found that fund charges are not always visible to retail investors and, when they were, investors might not pay sufficient attention to charges or understand their impact on investment returns.
As such, new rules that take effect on 7 August this year will require asset managers offering a performance fee to calculate them based on funds' performance after the deduction of all other fees.
Meanwhile, online investment service Bestinvest revealed assets held in consistently underperforming 'dog' funds have surged to £54.6bn, the highest level on record.
The number of 'dog' funds now stands at 111, a 91% increase from the 58 underperforming funds outed in August, with the combined list of underperformers estimated to be earning fund groups £537m in annual fees from investors.
Jason Hollands, managing director at Bestinvest, said while the huge difference in returns between the best and worst-performing funds cannot be attributed solely to fees, it is essential investors "check whether or not the funds [they] hold are adding value for the fees being charged as many simply do not".
But investors are already beginning to vote with their feet, it seems. Reports last week suggested performance fee funds launched in 2018 by Fidelity International and Allianz Global Investors have struggled to gather assets with investors opting out of switching to the new structure.
Fidelity's plans to introduce the 'fulcrum fee' model sent ripples through the industry when they were announced in October 2017, with fund buyers warning the model may prove confusing for investors, who may end up overpaying for outperformance.
According to the Financial Times, nine of the 12 Fidelity funds stood at less than £60,000 each by the end of last year with five of the products managing less than £4,000 each.
Similarly, Allianz Global Investors, which launched five performance fee-related funds last April, had less than £30,000 in assets in three of them by the end of December.
There is clearly more work to be done on remodelling fee structures and educating investors. But could this be the year the wider industry tackles the issue head on?
