I suppose it had to happen sooner rather than later. As the debate about fees charged by fund managers, especially in the investment trust space, heats up, sooner or later a big manager would walk away from a board demanding changes (and presumably lower costs).
Cue news this morning from the board of Invesco Perpetual Enhanced Income that it received a letter from Invesco Fund Managers – this morning – stating that they intend to step down as the investment manager. This letter has been sent “notwithstanding the detailed and extended efforts of the Board to reach satisfactory ongoing contractual arrangements (including in respect of fees payable) for both shareholders and the current manager having regard to prevailing market practice”. The Board has subsequently written to Invesco highlighting that “further discussions will be required in respect of any transitional period”.
I have to say that in this debate I’m slightly less worried about the existence of performance fees and rather more worried that fund managers be transparent and justify their fees. I’m all for active managers as long as they are rewarded for active outperformance. An obsessive focus on simply lowering the overall cost of investment management is a dangerous slippery slope for most active fund managers – forcing them to compete with passive funds.
So, charge for performance, yes – but don’t expect to get paid if you underperform.
Anyway, it’s against the backdrop of this fascinating debate that I’ve got another blog from my colleague Frank Buhagiar about fees and Fidelity.
Over to Frank:
In a perfect world, markets would always go up and investors would enjoy a smooth passage to the land of milk and honey. Sadly, the world is not perfect and markets do fall as well as rise, but wouldn’t the roller coaster ride be that much more palatable if a fund’s management fees went down as well as up in line with its relative performance against a benchmark? Step up Fidelity International, which towards the end of last year announced it was adopting a ‘fulcrum fee model’ for its actively managed equity funds to introduce, in the leading fund manager’s own words, ‘a two-way sharing of risk and return’.
Under Fidelity’s ‘fulcrum fee model’, a fund’s annual management charge is firstly lowered by a set amount. At a time when fees for funds are clearly on a downward trajectory, nothing particularly ground-breaking there. However, what does have a claim to being innovative is a new variable performance-related fee that will result in investors having to pay more or less, depending on how a fund performs against its benchmark. As Brian Conroy of Fidelity International puts it: “Where we deliver outperformance we will share in the upside and where we deliver benchmark performance or less clients will pay less than they currently do.”
The new variable fee structure came into effect on 1 March 2018. This involved a 0.1% cut in the annual management fee, satisfying Fidelity’s pledge to lower the fixed charge. At the same time, a 0.2% variable fee was introduced which could reduce the annual charge by a further 0.2% if the fund in question underperforms its benchmark. Conversely if the fund outperforms, then the standard management fee could increase by 0.2%.
Just in case anyone was wondering if this was a smoke and mirrors exercise that would leave the amount investors paid for Fidelity’s stock-picking skills little changed from the previous regime, the fund manager helpfully provided a graphic showing the effect of the changes on a notional fund that originally charged a 0.75% flat fee. Under the fulcrum fee model, the base fee is lowered to 0.65% but the actual amount paid by an investor could fall to as low as 0.45% should the fund underperform its benchmark, 0.3% lower than the old 0.75% charge. Should the fund outperform then the base fee could go as high as 0.85%, 0.1% higher than the old 0.75% charge. Presumably Fidelity is banking on investors being chuffed with the outperformance to not mind paying that little bit extra.
The new fee structure is to be applied to all of Fidelity’s funds via a phased approach starting with a group of 10 active equity funds, representing approximately 17% of the equity portion of Fidelity’s total assets under management. Fidelity has also said it will be looking to persuade the boards of the investment trusts where it is the fund manager of the merits of adopting the ‘fulcrum fee’ model.
Fidelity’s Mr Conroy added: “We are passionate about giving our clients both choice and value, and we believe innovation in fee structures is essential if active fund management is to succeed going forward. Our variable management fee clearly aligns our interests to our clients. We believe this is a meaningful step and also one that we hope will be adopted by the wider asset management industry.” Hopefully, someone has reminded Fidelity to change its disclaimer: ‘prices and FEES can fall as well as rise’.