(Under) performance fees

The FMA has made good progress improving the experience of investors in managed funds.  Manager disclosure is better and some of the worst forms of behaviour have gone.  One remaining grey area that needs a lot of work however, is performance fees. 

There is no consistency among New Zealand managers on how performance fees are designed, implemented and measured.  There is little thought leadership or discussion by the funds industry around the philosophy and appropriateness of different performance fee structures.

Performance fees can be appropriate if designed to truly align interests with investors – but the philosophy behind them needs to be made clear.  This article challenges the philosophy of many performance fee structures through two “what if” questions:
 

“What happens if purely passive funds charged performance fees in the same way actively managed funds do?”
and secondly: