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Fidelity variable fee not available via major platforms

Fidelity has introduced variable fee share classes on 10 of its funds but most platforms don't offer them
August 2, 2018

Fidelity International has launched share classes with variable management fees on 10 of its funds but these are not available on many investment platforms that private investors use. 

In October last year Fidelity said it would offer a new fee structure on some of its active equity funds that would vary according to their performance. These fees have a fixed starting point of 0.65 per cent which could rise or fall by up to 0.2 per cent to 0.85 per cent or 0.45 per cent respectively, depending on whether the fund beats its benchmark or not.

Fidelity's variable fee is different to a traditional performance fee. This is levied on top of a fixed annual fee when the fund beats a certain hurdle and does not reduce the fixed annual fee when the fund underperforms the given hurdle.

Fidelity had hoped to introduce the new variable fee share classes on 10 funds in March but regulatory approval took longer than expected, so they did not launch until 30 July. And the new share classes are only available via the Fidelity Personal Investing platform. Investment platforms such as Hargreaves Lansdown, Bestinvest and AJ Bell Youinvest said they don't currently plan to offer these share classes but would if there was significant client demand for them.

Jason Hollands, managing director at Tilney Group, which runs Bestinvest, said: "I don't think the new share classes themselves are going to drive demand".

However, Alliance Trust Savings says it is in discussions with Fidelity with regard to offering the variable fee share classes on its platform. 

If investment platforms decide to introduce the variable fee share classes, investors who want to move into them will have to instruct their platform to move their holdings into them, which should not incur a cost. However, in some cases investors may have to sell their existing holdings in the funds and then buy the new share class, and this could trigger a tax liability if the funds are held outside an individual savings account (Isa) or self-invested personal pension (Sipp).

And views are mixed on whether a variable fee structure is a good thing. The variable fees' starting points are lower than the annual management charges on the funds' older share classes of 0.75 per cent. But some analysts argue that the bottom end of the variable fees should be closer to the level of fees passive tracker or exchange-traded funds (ETF) charge, as when they fall to this level it is because the funds have underperformed their benchmarks.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "[Fidelity's] charging model makes things too complicated for investors without any obvious benefits. Investors who choose active funds expect outperformance as part of the annual fee they pay, without paying an additional charge when the fund does well."

But Fidelity argues that the variable fees better align the interests of the funds' managers and investors.

"We will give back during periods of relative underperformance," said Paras Anand, chief investment officer for equities at Fidelity International. "It demonstrates our ongoing commitment to providing the best possible value to our clients and we hope it will incentivise them to stay invested in active strategies over the long term."

The variable fee share classes have been introduced on the Fidelity American (GB00BF5FWM02), Fidelity Asian Dividend (GB00BF5FWK87), Fidelity European (GB00BF5FWJ72), Fidelity Global Special Situations (GB00BF5FWL94) and Fidelity Special Situations (GB00BF5FWH58) funds.

Three Fidelity-run investment trusts have already implemented a variable fee in place of their former charging structure – Fidelity China Special Situations (FCSS), Fidelity Asian Values (FAS) and Fidelity Japan Trust (FJV).

 

TrustOld feeNew fee (%)
Fidelity China Special Situations (FCSS)1% annual management charge + 1% performance fee07-1.1
Fidelity Asian Values (FAS)0.9%  on assets up to £200m, 0.85% on assets above £200m0.5-0.9 on all assets
Fidelity Japan Trust (FJV)0.85%0.5-0.9
Source: Fidelity

 

And Fidelity has introduced variable fee share classes on five of its Luxembourg domiciled funds: Fidelity Funds America (LU0755218046)/(LU0318939179), Fidelity Funds Emerging Markets Focus (LU1102506067)/(LU1102506141), Fidelity Funds European Growth (LU0346388373), Fidelity Funds European Larger (LU0318939765) and Fidelity Funds World (LU0318941662).

Fidelity hopes to introduce a variable fee structure on more funds.