In the most recent examples, two leading global investment houses - Fidelity International and Allianz Global Investors have linked their management fees with the performance of their active schemes, says a news report published in Financial Times.
While Fidelity International follows this charging model for its funds sold internationally, Allianz Global charges investors a management fee only if they beat their benchmarks across all active schemes.
In fact, a few fund houses such as Orbis Investment Management, which manages AUM of close to $30 billion operates many of its active funds on a ‘no performance no fee’ model. The company refunds cash to investors if their funds underperform their respective benchmarks.
The report says that investment houses have been under pressure to justify charges under active funds.
In 2005, Sahara Mutual Fund had introduced such a model in India. The CEO of Peerless MF (Essel Mutual Fund), Rajiv Shastri, who was the CEO then of Sahara Mutual Fund told Cafemutual that the model did not fare well among investors and distributors since it was ahead of its time.
Talking about this model, he said, “The fund house had segregated the fee structure in two buckets– recurring expenses and management fees. While they did not touch recurring expenses, the management fees varied with the performance. For instance, if the fund delivered positive returns but did not manage to beat its benchmark, the fund house charged half the management fees. Similarly, the fund house charged full management fee if the fund outperformed its benchmark with positive returns. There were no management fees on negative returns and underperformance.”
A CEO of a foreign fund house said that such a fee is not relevant for India. “You cannot compare Indian markets with developed markets as alpha generation is very challenging in such countries. Investors in developed nations have huge exposure to passive funds and hence, fund managers need to justify their charges on active funds,” he added.
