Fund managers taking a slice of an investment as performance fees regardless of whether the fund makes a profit face a ban.
MEPS are scrutinising the recent Undertakings for Collective Investment in Transferable Securities (UCITS) directive for improvements.
German MEP Sven Giegold wants to limit charges to a proportion of the value of the fund rather than any other incentive.
The proposal is in line with criticisms raised in the UK after research showed that performance payments rarely increase fund profits.
Geigold says the studies indicate performance fees to managers rarely stimulate fund performance, so any variable payment should reflect the fund size.
Outperformance
At least 50 funds listed by the Investment Managers Association (IMA) levy performance fees, which are generally deducted as a proportion of any outperformance of an agreed index or benchmark.
Only two open-ended funds charging performance fees have launched in 2012, a decrease from last year’s six, a dozen in 2010 and 18 in 2009, according to financial research firm Lipper.
Around 112 UK funds have charged performance fee at some time, only 80 funds – 3% of the UK open-ended market – now levy a charge, says the firm.
“Performance fees has declined, with new fund launches adopting such fees falling dramatically and other funds being closed or merged,” said the report from Lipper.
Those in favour of performance fees suggest they are in the best interests of investors and managers as they urge managers to perform well and to seek higher yields and growth.
Detractors
However, the detractors say this is not the case, and managers can give a disservice to investors and become lazy and lose their appetite to push a fund forward if the target has already been reached.
They also feel managers are happy to take a slice of any gain, but do not contribute or pay a penalty for any losses.
Lipper found no evidence that performance fees improved returns.
Analysing the absolute return sector, which has a high proportion of funds charging performance fees, the firm found funds with fees had positive 12-month rolling returns 62% of the time, against 63% for by funds without the charge.
Funds charging fees tend to be more risky for investors, but offer higher maximum drawdowns and less predictable returns.
