Fidelity International has announced details of its new pricing model – the Variable Management Fee – which operates as a sliding scale and acts as what the company calls a ‘two-way sharing’ of risk and return.
As reported, in October, Fidelity announced that it would be making “a fundamental change” in how it charges for its services in response to the challenge around the value of active fund management, the industry’s alignment with client interests and what it calls the “need for innovation” on fees.
The industry has been criticised by the UK financial services regulator for its fee models and that has acted a prompt for the changes, something that Fidelity hopes that other fund management companies will follow suit on.
Fidelity said in a statement that the Variable Management Fee (VFM) will be launched on 1 March 2018 initially across the clean share classes of 10 active equity funds (12 share classes) in its pooled fund range (OEICs/SICAVs) representing a cross section of funds which account for nearly 17% of Fidelity’s total equity assets under management (subject to regulatory approval).
Additional share classes across the Fidelity funds range will be phased in at later dates. Clients with segregated portfolios including institutions and Investment Trusts will have access to an individually adapted version of the fee model.
Brian Conroy, president, Fidelity International, said: “We are passionate about giving our clients both choice and value, and we believe innovation in fee structures is essential if active fund management is to succeed going forward. Our Variable Management Fee clearly aligns our interests to our clients. We believe this is a meaningful step and also one that we hope will be adopted by the wider asset management industry.”
Performance related fees
Among the key features of the VMF: Fidelity will reduce the annual management charge (AMC) on the new Variable Management Fee share class by 0.10%. The variable part of the fee will slide up or down based on how the fund outperforms or underperforms relative to its pre-defined market index, after all fees and charge. This scale will reach a maximum of +0.2% above the annual management charge (the ceiling) and go as low as -0.2% below the annual management charge (the floor), the company said.
The maximum and minimum fee levels are reached once the fund outperforms or underperforms the relevant market index by +2% or -2% on an annualised basis calculated over a three-year rolling period. The fee will only start to increase from the base level once the fund has beaten the market index after all fees and charges.
Patrick Connolly, pictured left, Certified Financial Planner, Chase de Vere, said: “We have known for some time that Fidelity was planning to launch performance-based charges on its investment funds and it is good that we now have some detail. While these new charges will initially apply to a small number of funds, we can expect Fidelity’s other funds to be included over time
“The base line reduction of the annual management charge from 0.75% to 0.65% is good news for investors, although it needs to be recognised that Fidelity will, unlike many other investment companies, be passing on research costs to investors, and these will be included in the Ongoing Charges Figure (OCF)
“We dislike the performance fees which are most common in the investment industry, where fund managers are rewarded when they perform well and yet aren’t penalised when they perform badly. However, Fidelity’s performance fees seem to strike a fairer balance between rewarding managers for strong performance but also protecting the interests of investors if their investments perform badly
Connolly added that he still feels that there is “some doubt” over whether investors will fully understand how the new charging structures work and also if they will be happy to pay extra for good performance when they will ideally want both strong performance and competitive charges.
‘Great news for investors’
“These changes have been driven by regulatory pressures, which are forcing greater transparency and putting downward force on fund charges,” he added. “This is great news for investors, who too often are paying too much for poor performance, as Fidelity’s move has thrown the gauntlet down to other investment managers to review their charging structures.
“This will hopefully lead to more price competition and ultimately lower charges, something which investors in actively managed funds haven’t benefited from in the past.
The table below highlights funds in scope for the first tranche. Additional share classes across the Fidelity funds range will be phased in at later dates.
|Current OEIC Share Class Equivalent||Current LUX SICAV Share Class Equivalent|
|Fidelity Special Situations Fund W Acc||Fidelity Funds America – Y -ACC – EUR|
|Fidelity European Fund Fund W Acc||Fidelity Funds America – Y – ACC – USD|
|Fidelity Asian Dividend Fund W Inc||Fidelity Funds Emerging Markets Focus – I -ACC – USD|
|Fidelity Global Special Situations Fund W Acc||Fidelity Funds Emerging Markets Focus – Y -ACC – USD|
|Fidelity American Fund W Acc||Fidelity Funds European Growth Y – ACC – EUR|
|Fidelity Funds European Larger – Y ACC -EUR|
|Fidelity Funds World Y-ACC-EUR|