Performance fees fall dramatically across new funds, Lipper finds
The use of performance fees by unit trusts and open-ended investment companies (OEICs) declined in recent years. Research by data provider Lipper found that while many funds closed or merged, the number of new fund adopting such fees fell dramatically.
Overall, around 3% of unit trusts and OEICs have a performance fee structure. Among absolute return funds including ‘offshore’ funds, this figure rises to 63.5%, while 54% of locally-domiciled absolute return funds use a performance fee, Lipper added.
The report published by the company also analysed the differences in historical returns and risk of such funds depending on the use of performance fees.
“The average standard deviation and maximum drawdown for absolute return funds with performance fees are slightly higher than for funds without this fee. This can be explained by a significant minority of funds with performance fees having historical risk characteristics out of line from the rest of the sector,” Lipper said.
According to the company, even in the absolute return sector investors are not forced to invest in funds with performance fees, both because a sizeable proportion of these funds maintain a more conventional fee structure, and because funds with performance fees have not demonstrated, on average, that they deliver better returns or lower risk.
“This research shows that investors can have a very real influence on the fees being charged by funds. At the same time it seems much more likely that most of the new launches using performance fees will come from ‘offshore’ rather than locally domiciled funds,” said Ed Moisson, Lipper’s head of UK and cross-border research.