Harry Nimmo’s (pictured) Standard Life UK Smaller Companies IT is the latest closed-ended fund to abandon the practice, which the firm has counteracted by increasing its annual management charge (AMC). Richard Buxton’s Schroder UK Growth IT, the British Assets Trust and the F&C Private Equity Trust are among those that have either lowered or scrapped their performance fee in the last year or so.
The board of Nimmo’s trust highlighted the onset of next year’s Retail Distribution Review (RDR) – which many experts believe will increase the popularity of trusts among retail investors – as the principal reason why it decided to change its fee structure.
In a note to investors, the board said: "The board recognises the importance of the [trust] having a clear and easily understood fee basis to ensure that it remains competitive and fair to shareholders in the post-RDR environment."
Performance fees have a significant impact on the total cost of owning a fund, illustrated by recent research from the Association of Investment Companies (AIC).
According to its calculations, the cost of holding Mark Barnett’s Invesco Perpetual Select UK Equity trust, for example, jumps from 1.2 per cent a year to 2.17 per cent when the performance fee is included.
In the case of Angus Tulloch’s Scottish Oriental Smaller Companies trust, the cost jumps from 1.01 per cent a year to 2.28 per cent.
Given that many cost-conscious investors avoid funds that use performance fees, many IFAs think Standard Life’s move could make it more attractive.
"From a PR perspective, this is a logical thing to do," said Damien Fahy, head of research at Dennehy Weller & Co.
"If they are trying to target the retail investors, then many will like this move. That said, as a firm we tend to look beyond charges and look at performance net of fees," he added.
The Association of Investment Companies’ Gemma Jackson added: "Most of the trusts that have abandoned their performance fees in the last year tend to be retail-focused, which may well have something to do with the onset of RDR."
While Juliet Schooling-Latter, head of research at Chelsea Financial Services, understands why investors are concerned with costs, she believes the criticism levelled at groups that use performance fees is often misplaced.
"It all comes down to how they’re constructed – as long as they have a high watermark and aren’t charging a fee just because they beat cash, these often align a manager’s interests with the investor’s," she said.
"Some fund houses, like JO Hambro, counteract [the performance fee] with lower general charges, which is also a plus-point."
"I’d tell investors not to get too caught up about costs in general – at the end of the day, it’s the performance net of fees that matters," she added.