Fund that cuts your fees if it does badly

ONE of the world’s largest fund managers has revealed a revolutionary price structure that will cut savers’ costs when its funds do badly but hike them when they perform well.

Fidelity revealed this week that it will add or subtract up to 0.2 percentage points from its fees on a range of funds depending on how they perform.

By opting into the system, your fees will fall from 0.75pc to 0.65pc. But this will vary between 0.45pc if the fund underperforms the market by 2pc, and 0.85pc if it outperforms the market by 2pc or more.

It means you won’t have to fork out eye-watering fees if your investment performs badly – but only if you opt in to the new system. If you don’t switch, your charges will stay the same, at 0.75pc.

But will Fidelity’s new pricing structure really give your savings a boost?

Adrian Lowcock, of investment firm Architas, says: ‘It will give more motivation for fund managers – especially ones who try to hug the index – to perform well because, if they don’t, then they will get less in fees.

‘Another benefit is that if the fund has a bad period, which nearly all of them do, then at least as an investor you won’t pay as much.’

REsEArch by Money Mail found that the difference would be tiny on a £10,000 pot, but the potential benefits get bigger the larger the investment made.

The pricing system is being rolled out to ten funds initially, including the popular Fidelity special situations and Fidelity European. While the standard fee is 0.65pc, it works on a sliding scale depending on how the fund performs. It can fall as low as 0.45pc if the fund is 2pc down on the market over a rolling threeyear period and rise to 0.85pc if it beats the market by 2pc or more.

so if the fund is up just 0.7pc on the market a year over three years after fees, then your fee will rise from 0.65pc to 0.72pc – 0.07 percentage points.

It would fall to 0.58pc if the fund was down 0.7pc on the market over the same period.

To give a real-life example, Fidelity European has returned 14.2pc a year after fees over the past three years.

By contrast, the MscI Europe Excluding UK index, which it is measured against, has returned 13pc – 1.2 percentage points less than Fidelity European.

so to work out the fee you add 0.12 percentage points to the standard 0.65pc annual charge, meaning you would pay 0.77pc.

If you had invested £10,000 in Fidelity special situations ten years ago, you would be sitting on £22,543 under the old pricing structure.

Under the new system you would be left with £22,511 – £32 less. This is because it has performed strongly over the past decade and so you would have had to pay higher fees under the new system.

A £10,000 investment in Fidelity European would leave you with £17,908 under the old charges, whereas you would be left with £18,073 under the new charging system – £165 more. This is because the fund has performed less consistently than the special situations fund and so you would have had periods where you paid less in fees.

Laith Khalaf, of stock broker hargreaves Lansdown, says that the idea is ‘good in theory’ but argues that it makes comparing funds difficult.

he adds: ‘When you look at the numbers, clearly it makes little difference. But what it does is add a lot of complexity, which is not what you want as an investor.

‘People won’t stick with a fund just because it has a smaller fee when it doesn’t perform well. They will get out of it. If you’re an investor who feels they can’t pick an outstanding fund, then get a cheap tracker fund.’

however, others believe it could weed out so-called ‘closet tracker’ fund managers who hide their inabilities by mimicking the market.

Pete horrell of Fidelity says: ‘We firmly believe this is a fairer way to structure fees. Because of this we will be punished for hugging the benchmark compared to where the fees stand today.’