Global investment giant Fidelity International has re-engineered its active fund-pricing model with the introduction of a ‘fulcrum’ performance fee that will see clients claw back costs if the products sink below benchmark returns.
Under the fee-rethink revealed last week, Fidelity, which manages close to US$400 billion worldwide including for a handful of NZ wholesale clients, will cut its annual base management fee on active funds while implementing the swinging performance impost.
The Bermuda-headquartered Fidelity International was originally the global arm of US-based Fidelity Investments but was spun off to private owners in 1980.
In a statement, Brian Conroy, Fidelity International head, said the move would mean the manager will “be paid according to how well we do for our clients”.
“These changes will more closely align the performance of our business with the performance of our clients’ portfolios and deliver what we believe clients and regulators are looking for,” Conroy said in the release. “Our fee structure will give back for underperformance of the benchmark, whereas others do not.”
The variable Fidelity fee on active funds would be framed within, yet-to-be-revealed, minimum and maximum caps.
In a 2011 submission to the Financial Markets Authority (FMA) on performance fees, research house Morningstar notes that the ‘fulcrum’ approach is mandatory in the US for funds targeting retail investors that wish to charge performance fees.
“The use of [the fulcrum model] makes many elements of the standard performance fee employed in New Zealand (high watermarks, hurdles, and resets) redundant,” the Morningstar submission says.
However, the Morningstar paper says the “reaction of US fund managers to more investor-friendly fee structures does not provide a strong endorsement of their confidence in their ability to add consistent value. The introduction of these regulations resulted in the number of mutual funds charging performance fees falling dramatically.”
In New Zealand managers such as Fisher Funds and Milford Asset Management charge performance fees to retail investors, including through related KiwiSaver schemes.
Fidelity also manages a large suite of passive funds that would retain current pricing schedules.
“For those clients who simply want to drive down costs and do not want to pay for the active approach, we will be extending our successful range of low cost index funds on a global basis, accessible to all clients.” Conroy said.
From next year, too, Fidelity will begin charging clients directly for third-party research in line with new MIFID II regulations set to take effect in January 2018.
According to a McKinsey report, the MIFID II regime, which requires managers to separate out equity research, would shake-up institutional fund operating models.
Fidelity says the “reduction of our base management fee will exceed and offset the allocated client charge for this research”.
Conroy said the Fidelity fee review was also partly influenced by the UK Financial Conduct Authority’s recent enquiry into the funds management sector.
“Having looked at the implications of upcoming regulation, as well as taking into account feedback from the UK regulator in its recent market study on the lack of pricing innovation in our industry, we believe that a far more fundamental change to how clients are charged needs to be instituted,” he said in the statement. “We are passionate about giving our clients both choice and value and these changes will even better align our services directly to their needs and expectations. We look forward to working with all our clients over the coming months to discuss and implement these changes.”