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Fidelity Investments and the drive for more transparency


Fidelity Investments starts the week embroiled in accusations of being a misogynistic men’s club, but let’s also not lose sight of the fact that the US mutual funds giant is also seeking to address the issue of transparency, by cutting its management fees and adding an element of performance-related fees, in line with what many hedge funds are already doing. Hedge funds have typically charged a 2% management fee and a 20% performance fees, based on a high water mark.

While mutual funds groups like Fidelity Investments are unlikely to go as far as this, what IS important is that the fund manager is recognising that investors would like to see cheaper funds and fees linked to success.

Look back over the last 20 years and you will see many fund groups charging the same management fees to clients, regardless of how well the funds themselves perform. What has changed is the increasing popularity of ETFs – exchange traded funds – which track a stock market index and charge much lower fees than actively managed funds. This has placed pressure on groups like Fidelity Investments to respond in some manner in order to be able to retain retail clients.

Competition has been particularly fierce in the United States. Research by S&P Dow Jones last year found that almost all the actively managed US, global and emerging markets funds have failed to beat the market since 2006.

Farewell to a flat fee approach for Fidelity Investments

Fidelity International, which looks after over £230 billion of Fidelity Investments non-US domiciled funds, has said this month it is abandoning a flat fee model and moving to more of a performance-based charging structure. For the investor, this means that an additional fee will only be levied if the Fidelity Investments fund managers are able to beat their assigned benchmarks, which, as we have seen historically, is difficult to do. But it beats having to pay management fees for a fund that is losing you money.

Fidelity Investments said the fee changes will only apply to equity funds that are currently sold globally, and at this point not to its enormous range of US mutual funds.

“We have listened to the criticisms of the active management industry and rethought our approach,” explains Dominic Rossi, the chief investment officer for global equities at Fidelity Investments. “We think the industry has reached a point in time when it needs to move on.”

These are exciting times to be a fund investor. Several fund management groups are responding in a similar vein to Fidelity Investments – take for example Orbis Investment Management. A number of its funds do not charge a fee if they underperform, or if they do charge a fee, and then later underperform their index, the company refunds the fee. This is a spectacular advance on where the market used to be even 10 years ago. It is being prompted by fierce competition in the UK from the ETF market and the realisation by many investors that you can track the index for a fraction of the cost of an actively managed fund.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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