Funds Talk the Performance Fee Talk

Although there has been a good deal of noise in the past few years over mutual funds offering performance-based fees, mutual fund companies seem more to be talking the performance fee talk than actually walking it, MarketWatch reports.

Only about 200 out of 4,000 equity funds, or 5%, have a performance fee, according to Strategic Insight. However, those 200 funds represent about 10% of the $7 trillion in actively managed assets, according to Strategic Insight.

Many experts believe fund companies would be wise to offer performance fees because of their potential appeal to investors.

"The more money managers are compensated for doing well for their clients, the better for the investor and ultimately for the investment manager," said Don Putnam, managing partner of Grail Partners. "Mutual fund directors and investors should embrace this."

However, some fund companies are wary of offering performance fees for fear of retribution from the Securities and Exchange Commission over how they are calculated. One drawback to such fees, for instance, is that they are based on past performance. Should an investor decide to put money in a fund that has done very well but that suddenly tanks, they won't see their fees reduced but, instead, stay the same or possibly even increase. Also, recently, the SEC accused Accessor Capital Management and Bridgeway Capital Management with overcharging investors via performance fees.

Avi Nachmany, director of research at Strategic Insight, said it isn't hard for a fund company to overcharge investors through these fees, because they are complicated. "On the surface, it appeals as a concept, but when you focus on the details of performance fees, it's a very complicated exercise that needs to be structured carefully," Nachmany said. "Many funds and boards have concluded that it's much more complicated than they thought and haven't gone ahead with it."

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.