‘Twin’ performance fee share classes across Europe offer a 22 per cent discount in management fees
New research from Fitz Partners shows that asset managers have been launching a growing number of dual performance, or ‘Twin’ fee share classes.
These dual share classes, in one fund product, are identical in every aspect apart from their levels of management fee and the presence or not of a performance fee.
Performance fees are still often considered to be an “extra” cost to investors but more recently they have been linked to fund product innovation where performance fees can be associated with lower level management fees, offering an alternative fee model more appealing to investors.
In its latest research, Fitz Partners has identified 22 promoters offering 167 sets of ‘Twin’ share classes domiciled either in Luxembourg, Ireland or the UK. In comparable research from September 2017, only 43 sets of “Twin” share classes were in existence.
Hugues Gillibert (pictured), Fitz Partners’ CEO, says: “It is quite remarkable that in just two years, about four times more of these “Twin” fee structures have been launched across Europe. Even more importantly, over half of the 167 pairs have been designed for the retail market when previously these structures were limited to the institutional space. It is clear from our research that where fund selectors or investors have opposite views on the value of performance fees and both structures are in demand, asset managers would have created these comparable twin classes.”
Overall, when comparing all the “Twin” share classes, Fitz Partners found that their management fees differ by 21 basis points on average, which represents a 22 per cent drop in the average management fee of the share classes charging a performance fee. In our sample of “Twin” share classes, 77 per cent of those charged a performance fee in their latest financial accounts and this charge has added an average of 6 basis points to their overall total costs.
When considering Equity Funds only, and comparing “Twin” Retail share classes against “Twin” Institutional classes, Fitz Partners found that the performance fees charged to retail classes was on average 50 per cent larger than the performance fee charged to institutional classes but both performance fees make very similar increases to their corresponding total costs, 2.8 per cent for institutional and 2.9 per cent for retail classes.
Gillibert says: “In the current environment of price pressure, asset managers are engineering a significant 22 per cent discount on management fees to compensate the use of performance fees for comparable “Twin” share classes. This lower level of management fee mitigates most of the impact of the charged performance fees on investors’ total costs, and keep the net extra charge for outperformance at just 6 basis points.”