The attempt to attach fees to the performance of mutual funds in order to line up the interests of shareholders with that of fund managers has not really taken off, according to a recent piece by MarketWatch.
The on-line publication found that mutual fund managers were reticent to follow Janus Capital Groups lead of introducing performance-based fees, which compensate fund managers when their decisions lead to high returns and pay less when returns do not match benchmark indexes.
A common incentive program in the hedge-fund business, performance fees are relatively rare for mutual funds, especially in products designed for individual investors. Most mutual funds base management fees on a percentage of a shareholder’s invested assets, not performance.
According to the MarketWatch piece, many fund companies are reluctant to implement these incentive-like fees because of the increased scrutiny by regulators, particularly the SECs cracking down on the way performance fees are calculated.
Only around 200 of about 4,000 stock funds have some type of performance fee, Avi Nachmany, director of research at industry consultant Strategic Insight told MarketWatch. And even though Fidelity Investments and Vanguard Group have charged performance fees for years. Still, only about 10% of the $7 trillion in assets managed by fund companies have performance-based fees, Nachmany said. Excluding Fidelity and Vanguard, about $100 billion of stock mutual-fund assets have performance fees, he added.