Investors Shun New Breed of ‘Fees on Performance’ Funds
For years, finance journalists and investors have decried the fact that
The rise of cheaper, passive investments like index tracking funds over the last decade has combined with a number of studies showing a minority of active fund managers consistently beat their benchmark. The inevitable result has been a questioning of why investors should pay higher fees for investments that, on average, deliver poorer returns than passive index trackers. The response from Fidelity and Allianz was versions of some of their Europe-based funds that set base fees comparable to those of passive peers, only rising if and when they outperform.
Fidelity chair Abigail Johnson said at the time of the launch of the new
Allianz’s five new variable fee products haven’t done any better. By the end of last year
Ironically, it appears that investors actually prefer simple, easily explainable fee structures that offer certainty even if they are less fair. Variable fees also raise issues for online investment platforms that are obliged to simply and transparently list fees. As a result, the variable fee funds offered by Fidelity and Allianz are not listed on most retail-facing UK investment platforms. Wealth managers and advisors are also said to be hesitant to offer these funds to clients as they have to explain additional complexities and are concerned about clients being unhappy or confused when fees fluctuate.
Despite the disappointingly slow start both Fidelity and Allianz say they are committed to continuing their push towards offering funds with variable fee structures, in the interests of investors. While variable fee structure models may need tweaking there is evidence it will become a long term trend. The world’s largest pensions fund, Japan’s Government Pensions Investment Fund has recently moved to a variable fee model. But it looks like individual investors will need a little time to be convinced that fairer is better than simpler when it comes to fund fees.
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