Mutual funds: News

Author: Stuart Fieldhouse

The increasing use of performance fees amongst investment companies has not in itself lead to investment managers performing better, according to new research issued today by leading business and financial advisers Grant Thornton.

Over 45% of mainstream investment companies have some form of "performance fees" aligned to the manager in which a manager is rewarded for exceeding a benchmark or improving the net asset value of an investment company. Once predominantly the domain of hedge fund managers, performance fees have become commonplace and are seen by-and-large as a positive development.

However, analysis of a sample of investment companies between 2003 and 2007 found that on average funds without performance fees perform slightly better than those with performance fees. The study also indicates that within this sample performance fees have historically beaten their benchmarks 53% of the time whereas those without performance fees did so 59% of the time.

"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," said Hugh Aldous, a consultant with Grant Thornton.

Furthermore, the report has highlighted that there is little material benefit for shareholders in introducing performance fees. Therefore, boards of investment companies should be robust about the calibre of manager that 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. 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," said Aldous. 

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