Europe's Funds Industry Moves To Lower Performance Fees, Says Fitz Partners

Josh O'Neill

20 September 2017

European asset managers are taking steps to lower performance fees, new data shows, at a time when Europe's funds industry is already weighing up how to best cover research costs once a new directive is implemented next January.

As management fees are largely used to remunerate asset managers, it might be assumed that a performance fee would be charged, in effect reducing the level of fixed management fees.

However, this is usually not the case, according to fund research house , which has found it “challenging to find substantial differences” between levels of management fees levied on funds carrying a performance fee and those that do not.

But this “historical, expensive model” may be changing, Fitz Partners has said.

When comparing “twin” share classes, which are identical except for their differing management and performance fees, Fitz Partners has found that their management fees vary by 26 basis points on average. This represents a 24 per cent drop in the average management fee of the share class also charging a performance fee. In a sample of 43 products, ongoing charges (OCFs) including performance fees for share classes that do not levy a performance fee were cheaper to the tune of 19 basis points.

“It is interesting to note that, when you have the choice between “twin” share classes, you might actually get a discount when choosing to invest into the share class carrying a performance fee,” Hugues Gillibert, chief executive of Fitz Partners, said. “We were glad to see a significant reduction in management fees to compensate for the presence of a performance fee, but we did not expect this discount to remain after adding the cost of the performance fee to the funds OCFs.”

Fitz Partners' findings come as the European asset management sector is readying itself to navigate a fresh regulatory landscape carved out by the second iteration of the European Union's Markets in Financial Instruments Directive, or . The wide-reaching directive will transform transparency and reporting standards once it takes effect in January 2018, and will for the first time require money managers to “unbundle” how they pay for investment research, separating the costs from trading fees.

When considering all share classes, Fitz Partners estimates that management fees remain the same, regardless of whether performance fees are levied or not. But administration fees for funds carrying a performance fee are higher by an average of eight basis points, the firm notes.