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Fidelity to introduce variable fees on 10 funds

Fidelity has announced further details of its new variable fund fee structure
December 7, 2017

Fidelity International has released further details on the variable fee structure it is introducing to its funds from 1 March 2018.

Under the new structure, which the asset manager announced in October, the annual management charge will slide up or down based on how a fund outperforms or underperforms relative to its benchmark. This scale will reach a maximum of 0.2 per cent above the base annual management charge and go as low as 0.2 per cent below it. The maximum and minimum fee levels are reached once the fund outperforms or underperforms its benchmark index by 2 per cent or -2 per cent on an annualised basis, calculated over a three-year rolling period.

The variable management fee will be calculated every day based on the return of the given fund's share class relative to its benchmark index over the previous three-year period. The daily portion of the variable management fee will then be accrued for the share class.

The fee will only start to increase from the base level once the fund has beaten its benchmark index after all fees and charges.

This is in contrast to the performance fees on some investment trusts and funds in the UK, whereby investors can get charged more if these beat their benchmarks, but do not pay less than the base fee for underperformance. Variable management fees, or 'fulcrum fees,' are more common in the US where, for example, Fidelity Investments has been offering variable management fees on some of its funds since the early 1970s.

Fidelity International will launch new share classes with variable management charges for 10 funds, five of which are available to UK private investors, on 1 March. The new share classes will also have an annual management charge 0.1 per cent lower than that of these funds' existing platform share classes.

Existing charges of Fidelity funds introducing a variable fee structure

FundAnnual management charge (%)*Ongoing charge (%) Comparative index
Fidelity Special Situations (GB00B88V3X40)0.750.94FTSE All Share
Fidelity European (GB00BFRT3504)0.750.95MSCI Europe Ex UK NR EUR
Fidelity Asian Dividend (GB00B8W5M023)0.751.06MSCI AC Asia Pac Ex JPN NR USD
Fidelity Global Special Situations (GB00B8HT7153)0.750.95MSCI ACWI NR USD
Fidelity American (GB00B8GPC429)0.750.96S&P 500 TR GBP
Source: Fidelity, *Morningstar
Offshore Fidelity funds introducing a variable fee structure
Fidelity Funds America (LU0755218046)/(LU0318939179)
Fidelity Funds Emerging Markets Focus ( LU1102506067)/(LU1102506141)
Fidelity Funds European Growth (LU0346388373)
Fidelity Funds European Larger (LU0318939765)
Fidelity Funds World (LU0318941662)
Source: Fidelity

So, for example, a current annual management charge of 0.75 per cent could go as low as 0.45 per cent if the fund underperforms – the new base fee of 0.65 per cent minus 0.2 per cent. Or it could go as high as 0.85 per cent if the fund outperforms its benchmark. Fidelity adds that this would only be 0.1 per cent above where the charge is today for outperformance, but 0.3 per cent below for underperformance. If the fund matches its benchmark's return the annual management charge would be 0.65 per cent, which is lower than what is currently charged.

Fidelity says the new fee structure will create a much fairer alignment between its clients and itself, and acts as a two-way sharing of risk and return.

"This new fee model allows us to demonstrate our value proposition while sharing in the cost during periods of underperformance which all active managers, even the best, experience from time to time," said Paras Anand, chief investment officer, equities, Europe at Fidelity International. "We hope, therefore, that this goes some way to incentivising clients to consider the value of active investing over the long term."

The 'clean' share classes of active equity funds, which don't include commission, typically have an annual management charge of about 0.75 per cent, according to Fidelity International. But this is far from the total cost that investors pay – a fuller representation of this is the ongoing charge, which includes management fees, administration fees, custodian and depositary fees, transaction charges, shareholder reporting costs, regulatory registration fees and bank charges.

It does not include costs such as performance fees and portfolio transaction costs, and the platform fees or transaction fees that investors pay for buying the fund.

The Investment Association, the trade body that represents UK investment managers, says the ongoing charge of 'clean' share classes of active equities funds was typically 0.92 per cent as of 2015.

 

 

Rolling out the structure

Fidelity International has decided to start offering share classes with a variable fee on these 10 funds because they account for nearly 17 per cent of its equity assets under management, over $30bn, and are some of its best-selling and largest funds. It will phase in share classes with a variable fee across the rest of its funds at later dates.

Fidelity International said: "It will take time to offer variable management fee share classes more widely across our range of funds so we wanted to make sure that as large a proportion of our clients as possible could access the new fee model at launch. These funds are not simply our best performing funds - they have all gone through periods of under- and outperformance to varying degrees over time."

Fidelity will also look to apply a version of its variable fee model to the investment trusts it manages, "so we will be discussing the model with each trust's board in due course".

However, investment trusts are independent companies so whether they adopt this structure will depend on what each trust's board decides.

One of the five trusts Fidelity manages, Fidelity China Special Situations (FCSS), has a performance fee though it was not triggered in its last financial year.

Fidelity managed investment trusts
TrustOngoing charge (%)
Fidelity Asian Values (FAS)1.29
Fidelity China Special Situations (FCSS)1.16
Fidelity European Values (FEV)0.99
Fidelity Japanese Values (FJV)1.46
Fidelity Special Values (FSV)1.06
Source: Association of Investment Companies

 

Research costs

Under new European regulations known as Mifid II that come into force in January, asset managers will have to make explicit the research costs involved in their funds, and choose whether or not to pass on the costs to their investors. Fidelity International will pass on the cost of third-party research to investors in its funds, but as this currently stands at 0.0228 per cent across its funds, the 0.1 per cent reduction in the base fee of the new variable share classes will more than cover this.

But some other asset managers such as Newton Investment Management, UBS and Deutsche Bank will absorb research costs rather than pass it on to investors in their funds.

Investors who remain in the older share classes of Fidelity funds will not benefit from an annual management fee decrease and will also be paying research fees. However, Fidelity told Investors Chronicle earlier this year that its reliance on external research had reduced over time, bringing down the cost to customers.

 

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