The most commonly used fee structure in the UK may benefit fund managers, but it is the least appropriate from the
perspective of investor welfare, according to a report by Cass Business School.
The research, which adds to the on-going debate over management fees says fund managers should consider adopting a fee structure that better aligns investors' and managers' interests, by sharing losses as well as gains.
Academics at Cass are now pushing for a review of fund charges levied across the UK asset management industry, after the study discovered that the most prevalent fee structure, a charge fixed as a proportion of assets under management, is best suited to fund managers but rarely suitable for their clients.
In the report – called Heads we win, tails you lose – researchers at Cass, part of City University London, compared the effect of three different mutual fund fee structures on the financial well being of investors and managers.
These included: fixed fee, in which the fee is fixed as a proportion of assets under management (AUM); asymmetric fee, where the base fee is fixed as a proportion of AUM, but the manager can also earn a portion of upside performance; and symmetric fee, a performance-based structure where investors and managers share both the down and upside of performance.
Professors Andrew Clare, Richard Payne, Nick Motson and Steve Thomas simulated the performance of thousands of fund managers with varying degrees of skill, using a benchmark return matched to the FTSE 100. They then calculated the average financial wellbeing of investors and fund managers resulting from the manager performance.
Professor Payne says: "The study identifies a clear incentive mismatch between the best interests of investors and managers. More specifically, there is no single structure that simultaneously maximises both the investors' and the managers' satisfaction."
Co-author, professor Clare, says it is time for a serious debate about fund management fee structures. He adds: "Our results show that a symmetric fee structure is, on the whole, in the best interest of investors. How long can an industry ignore the best interests of its customers?"
The research was sponsored by Orbis Investment Management.
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