Investors are struggling to work out whether fund management fees represent value for money, despite recent efforts by the regulator to increase transparency. Investment funds that take an active approach are attempting to respond to the fierce competition presented by cheap passive funds, which can be bought for next to nothing through certain providers. Some are offering new fee structures that promise lower-than-normal rates at times when the fund fails to deliver, with a higher rate applying if the fund outperforms its benchmark. This month, Allianz Global Investors is rolling out a new low-rate fixed fee structure for a number of its equity funds. Investors will pay something close to what they would normally pay for a passive tracker, if the fund does not hit its targets. However, when the fund does perform, investors will pay a fee of 20pc on the money made through outperformance that day. The daily outperformance fee is accrued and paid at the end of the year.
Retail investors have been warned by industry experts that performance-based fund fees rarely lead to reduced costs. Mark Dampier, of Hargreaves Lansdown, said nearly all performance fees are in the interests of fund managers rather than investors. John Husselbee, of Allianz Global Investors, said it would be difficult for investors to calculate the value of performance-based cost structures. Active fund managers have started adopting performance-based fees with lower rates when the fund under-performs its benchmark. The move is in response to growing competition from cheaper, passive funds.