Minimal assets have been gathered by a series of funds that link fees to performance, which were launched with fanfare by Fidelity International and Allianz Global Investors in 2018. The situation emphasises the problem facing alternative pricing structures.
Active fund managers are being put under pressure from the rise of cheap passive products, and this has caused traditional managers to scramble to offer funds that will be both popular with customers and protect revenue streams.
Last year Fidelity and AllianzGI introduced variable management fee versions of some of their Europe-domiciled equity funds. The two fund houses pledged to reduce management charges and apply an additional fee only if their funds outperformed.
Abigail Johnson, chair of Fidelity, said at the time that traditional fund fees, where investors are charged an annual percentage of the assets in the fund, required a “fundamental rethink”.
She said variable management fees would align asset managers’ interests with those of investors and encourage investors “to remain committed to active strategies through the natural fluctuations in short-term performance”.
So far, though, few investors have switched to performance-related fees, according to Morningstar data analysed by FTfm.
Nine of the 12 Fidelity funds managed less than £60,000 each at the end of December. Five of these products had less than £4,000 each.
Fidelity’s most successful variable-fee fund is a Luxembourg-domiciled global equity fund, which has £36m in assets, but the product is dwarfed by its £2.1bn fixed-fee equivalent fund.
The trend is mirrored at AllianzGI, which launched five variable-fee funds in April. Three of the funds managed less than £30,000 each at the end of 2018. The largest product, an emerging markets equity fund, had £400,742 in assets, compared with £166m for the same fund applying a standard fee.
Experts say the weak demand for the innovative fund fee model is linked to investor scepticism about variable charges because of their complexity and unpredictability.
Adrian Lowcock, head of personal investing for Willis Owen, the fund broker, said: “[Fidelity and AllianzGI] took a charging structure that was fairly simple and straightforward to explain to investors, even if it wasn’t entirely fair, and made it complicated and hard to explain.”
Many wealth managers and advisers are wary of variable-fee funds because they are not easily comparable and do not provide certainty of pricing to investors.
For the same reason, performance-fee funds face obstacles in being listed on platforms, one of the main retail distribution channels. Mike Barrett, director at consultancy The Lang Cat, said: “Some platforms might be unable to accurately illustrate the fees, so the funds can’t be added to these platforms.”
AllianzGI’s variable-fee funds are listed on the Pershing Nexus, Aviva and Transact platforms, while Fidelity’s funds are listed on its own personal investing and adviser platforms.
Dan Brocklebank, head of boutique Orbis Investments, said the variable-fee model will take time to gain traction because of “entrenched views about performance fees due to poor structures being used in the past”.
AllianzGI said variable fund fees needed time to win acceptance “not least because of the education required to differentiate this model from previous incarnations elsewhere that were far less client-friendly”.
The asset manager expects that the full-year performance data for its new funds “will help to improve transparency and demonstrate the value of this model to clients and their advisers”.
Despite the slow start, advocates of variable fund fees say the shift from standard fees is inevitable as investors continue to question how much value is added by active managers.
One sign that this trend is under way was the decision last year by Japan’s Government Pension Investment Fund, the world’s largest retirement pot, to move to this model.
Fidelity said it was pleased with the progress of its new fee model. The variable structure is a “meaningful step” that has “opened the doors to wider discussion on pricing structures”.
Fidelity also offers performance-related fees on several of its UK investment trusts. According to the manager’s own data to the end of January, £1.7bn of assets are invested in trusts that use this model.