The use of performance fees by open-ended funds such as unit trusts and Oeics has declined in recent years, according to research by data provider Lipper.
There are now just 80 open-ended funds with performance fees - just 3 per cent of the entire UK funds universe (112 funds have at one time or another had a performance fee structure in place). However, Lipper says around half of closed-ended funds (investment trusts) still use performance fees.
Lipper says one key reason why the use of performance fees has declined is "the Hargreaves Lansdown effect". Pretty much every summer since 2004, a senior figure at the independent financial services provider has attacked the principle of paying fund managers a performance-related fee. Lipper concludes that scepticism among Hargreaves and other UK intermediaries has led directly to a dramatic slowing for adopting additional fees related to a fund's performance.
In theory, a fee that increases with performance helps align talented fund managers' interests with those of the investors, leading to better outcomes all round. However, the case is not proven. Lipper found that IMA Absolute Return sector 12-month returns are not substantially different between funds with or without performance fees.
Funds launched with performance fees
| Year | Number of funds |
|---|---|
| 2004 | 5 |
| 2005 | 7 |
| 2006 | 19 |
| 2007 | 13 |
| 2008 | 17 |
| 2009 | 18 |
| 2010 | 12 |
| 2011 | 6 |
| 2012 | 2 |
Source: Lipper
UK-domiciled funds with performance fees, by IMA Sector
| IMA Sector | Number of funds |
| Absolute Return | 27 |
| Specialist | 10 |
| Global | 8 |
| UK All Companies | 8 |
| North America | 4 |
| Unclassified | 4 |
| Mixed 20-60% | 3 |
| Mixed 40-85% | 3 |
Source: Lipper. Note: Eight other IMA Sectors have just one or two funds with performance fees.
