How would the conversation go if you called in on your boss and explained that you had not worked as hard as you could have during the year, but you expect a bonus anyway?
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The chat would not go well for most employees, but that’s exactly the way some financial firms treat their customers.
Some have the cheek to charge an outperformance bonus.
The bonus is paid on funds that may have lost investors thousands of pounds but may have still inched above the benchmark performance level.
For example, Fidelity runs a China Special Solutions Trust.
Managers don’t share in risk
If £1,000 was invested in the fund in January 2015, the cash had shrunk to £903 a year later.
Investors have to pay an annual charge of 1.5% and 15% of any change in the fund’s net asset value over the year that are more than 2% over the benchmark.
The benchmark is the MSCI China Index and the Fidelity trust was 2.3% above the MSCI level, which allowed Fidelity to snatch an extra reward.
“Investors would be forgiven for thinking that the funds win whether they make or lose money,” said Andrew Clare, who wrote a study on the issue for Cass Business School in 2014.
“I would like to see fund managers put their own money into their funds. They say they perform well and beat their benchmarks, so why shouldn’t they back with their own cash.
“The truth is they won’t risk losing money alongside their customers.”
Symmetric fees
The solution, says Clare’s report Heads We Win, Tails You Lose, is symmetric fees.
This business model rewards fund managers for performing well, but restricts how much they can take if their fund is not making a profit.
He also warns investors to watch out for fund managers who crow they are beating benchmarks when their funds are really losing money.
The comments are meaningless because the benchmark is irrelevant if the investor is losing cash.
Only three funds offer symmetric fees – the patient Capital Trust and two run by managers Orbis Access.
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