Long-only mutual funds with performance fees? You don’t see that every day…
Mar 5th, 2007 | Filed under: Investment Management FeesThe plot thickens in the continued blurring of the lines between your friendly neighbourhood mutual funds and those dastardly hedge funds. According to this story by Investment News, Lipper covers over 200 mutual funds with a performance fee. But catch this: 56% of these funds are managed by one company: Fidelity.
Geoff Bobroff, a fund industry consultant based in East Greenwich, R.I. tells Investment News that it’s no surprise that privately-held Fidelity (and also Vanguard) use performance fees. He says publicly-traded mutual fund companies can’t handle the revenue fluctuations that accompany such a volatile business model (although the success of recent hedge fund IPOs would suggest investors might be coming around). Investment News points out that Janus’ approval of performance fees for 13 of its funds is a notable exception.
As regular readers will know, we believe that fees ought to be tied in some way to alpha generation. This will help combat the growing scourge of index hugging that overtaken the mutual fund industry over the past few decades. The trick, of course, is to somehow address the asymmetry that performance-based fees introduce. (Mutual fund management fees are, after all, perfectly symmetrical. The manager makes just as much on a given level of assets whether returns are positive or negative.)
Apparently, Fidelity is now expanding its performance fee model to encompass nearly 20 adviser-sold mutual funds. The rationale, according to Investment News, is to provide a better incentive to managers to generate higher returns. It all sounds a little too easy, though. Simply increase the upside for managers and they’ll work harder? But the chart below (courtesy: Investment News) show that it might actually be true…
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