ESMA Puts Performance Fees Under the Microscope

The European regulator has launched a consultation into fund performance fees to ensure investors understand what they are and how much they cost

Holly Black 17 July, 2019 | 12:25PM
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The European regulator has launched a consultation into fund performance fees. There are concerns that some funds are not making it clear enough to investors that they may pay a performance fee, how this is calculated or how such charges can eat into returns.

The European Securities and Markets Authority (ESMA) wants to introduce a common set of standards to align how funds communicate any performance fees to their investors. The organisation said there are different disclosure practices across EU member states, which creates “undue risks” and “inconsistent levels of investor protection”.

Draft guidelines proposed by ESMA suggest the introduction of general principles on how performance fees are calculated and when a performance fee should be payable. The regulator also wants to ensure that the benchmarks against which a fund’s performance is measured are appropriate for its investment objectives and aims.

The organisation is now seeking feedback on its proposals, which it will consider at the end of the year.

Morningstar data shows that, looking at clean share classes only, there are more than 228 funds with a performance fee, which they may charge investors if certain criteria are hit.

The JOHCM UK Dynamic fund, for example, has a performance fee of 15% if the fund outperforms its benchmark, the FTSE All-Share. The fund has a Silver rating but scores only a Neutral rating on its price from Morningstar analysts who say the performance fee has the “potential to increase the fund’s overall cost”.

The Silver-rated Schroder ISF European Special Situations fund has a negative rating on its price from Morningstar analysts. Morningstar’s Samuel Meakin says: “The ongoing charge is higher than the median for European equity funds when considering clean share classes only. We therefore consider the fund to be expensive, particularly given that there is also a performance fee of 15% of returns in excess of the MSCI European Index benchmark.” He points out that while a performance fee can help to align the interests of a fund manager with investors, it should be used in conjunction with a lower annual management fee.

Laura Suter, personal finance analyst at AJ Bell, adds: “There is nothing wrong with performance fees, per se, as long as investors are clearly told how they are structured, what they are paying and that they are based on realistic measures. The danger is that their complexity and the way they are communicated mean that many investors have little hope of understanding what fees they are paying.”



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Holly Black  is Senior Editor,


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