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Fidelity changes charging structure on key funds

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Fidelity International has changed the way it charges for its investment funds, in a move designed to align fund performance with costs.

There will be a reduction in the annual management charge from 0.75% to 0.65%. It will then charge an additional fee of up to 0.2% if the fund performs well, but the price will drop if it performs badly, falling as low as 0.45% for significant underperformance.

The changes will apply to five funds from March, including the £3.2 billion Fidelity Special Situations fund.

Financial advisers tentatively welcomed the changes, but raised concerns about whether their clients would understand the new fee structure.

Patrick Connolly, certified financial planner, Chase de Vere, said: “We dislike the performance fees which are most common in the investment industry, where fund managers are rewarded when they perform well and yet aren’t penalised when they perform badly. However, Fidelity’s performance fees seem to strike a fairer balance between rewarding managers for strong performance but also protecting the interests of investors if their investments perform badly.”

“These changes have been driven by regulatory pressures, which are forcing greater transparency and putting downward force on fund charges. This is great news for investors, who too often are paying too much for poor performance, as Fidelity’s move has thrown the gauntlet down to other investment managers to review their charging structures.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the major problem with the new fee model is its complexity for investors trying to choose an active fund: “Investors will understandably find it very hard to get their heads around the new charging structure, and it will be challenging to compare the potential cost of these new share classes with the current share classes, and indeed with competitor funds charging a more traditional fixed percentage charge.

“We think investors would prefer to know what they are paying as a simple annual charge, rather than having to resort to a spreadsheet to model the possibilities. If this variable fee structure were to proliferate across the fund management industry, with different caps, floors and variable charges applied by different fund groups, it would make life extremely difficult for UK investors.”

Adrian Lowcock, investment director at Architas agrees that while this is an attempt at innovation from Fidelity, it may be too complex for the average investor: “The performance fee is charged if the fund outperforms its benchmark over a three year period. This means investors are effectively paying 0.65% if the manager simply tracks the index. That is expensive when compared to passive funds. When buying an active manager I expect them to outperform an index and that is why I pay a much higher fee. I do not expect them to be paid twice for doing their job reasonably well.”

“In spite of this there are some benefits to the fee structure which mean it could work for professional investors. An investor will pay 0.2% less for an underperforming fund than they would have under the previous structure. The performance fee will also be calculated over a rolling three year period so it isn’t just a case of outperforming one calendar year.”

The other four funds to adopt the new charging structure from March next year are Fidelity European, Asian Dividend, Global Special Situations and the American fund. Other funds will adopt similar structures in due course.

YourMoney’s view: At least Fidelity is doing its best. The fund management industry has come under pressure to ensure that investors don’t have to pay high fees for poorly performing funds, and this goes some of the way there. Yes, it is complicated, yes, it is imperfect, but it sets a challenge to the rest of the industry.


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