Top 100 Funds update

Previously, the management fee was up to 1.25 per cent of total assets, less current liabilities in any one year. This was made up of a basic management fee of 0.65 per cent (reduced to 0.2 per cent on any uninvested cash), plus a performance fee of up to 0.6 per cent.

However, in its September annual results, the board announced the abolition of the performance fee, stating: "One of the key aims of the FSA's Retail Distribution Review (RDR) is that investment products offer transparent charging structures. The Board recognises the importance of the Company having a clear and easily understood fee basis to ensure that it remains competitive and fair to shareholders in the post RDR environment.

"With this in mind, the Board and the Manager have agreed to simplify the management fee structure by removing the performance fee element and reverting to a basic management fee arrangement.

"With effect from 1 July 2012, the Manager will receive a basic management fee of 0.85 per cent per annum of the Company's total assets less current liabilities."

According to Lipper, around half of closed-ended funds (investment trusts) still use performance fees. 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. But this is not proven. Lipper found that 12-month returns from funds in the Investment Management Association's Absolute Return sector were not substantially different between funds with or without performance fees (read Performance fees in decline).

Our view is that investors may accept a performance fee if it is the only way to back a genuinely talented fund manager, such as Harry Nimmo. But they should look closely at the structure of performance fees, where the devil is in the detail. Some fee structures can influence the manager to increase or lower the risk of the portfolio, regardless of the investment opportunities on offer, in pursuit of their fee.

Standard Life UK Smaller Companies (ISIN: GB0002959582)

The investment trust aims to achieve long-term capital growth by investment in UK quoted smaller companies. The portfolio will normally comprise around 50 individual holdings representing Harry Nimmo's highest conviction investment ideas. Since he took over as manager on 1 September 2003, the company has delivered a net asset value (NAV) total return of 253 per cent, representing an annualised return of 15.3 per cent a year and outperforming the company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies) by 4.6 per cent per year.

However, the trust underperformed the index for the year ended 30 June 2012 due to its focus on risk aversion, combined with its strong preference for high-quality, growth-orientated stocks. Its net asset value total return was -7.6 per cent, compared with a total return from the index of -4.1 per cent.

The most significant additions to the portfolio in the past year were: PayPoint, operator of the yellow payment terminals in convenience stores; Diploma, the specialist industrial and healthcare distributor; Oxford Instruments; Waterlogic, the water purification company; NCC Group, an "ethical hacker" that assists companies with IT systems protection.

Source: Morningstar as at 5 October 2012

Top 20 investments (as at 30 June 2012)

Sector breakdown (as at 30 June 2012)