The Business Times ran an informative article on performance fees charged by investment funds.
Although less common in unit trusts, performance fees are part and parcel in Reits and infrastructure funds, such as the newly listed CitySpring Infrastructure Trust.
How it works is that if the fund generates a return above a pre-determined benchmark or a target rate, the performance fees will be levied on the “excess” returns. For example, the listed Macquarie International Infrastructure Fund charges a performance fee of 20% on the excess return above 8%.
The performance fees work like a bonus to the fund managers, rewarding them for doing a good job in generating high returns. Obviously, the performance fees are charged on top of the standard annual management fees.
The argument against having performance fees is that a fund manager may be motivated to take unreasonable and even excessive risk in order to get his/her “bonus”.
In conclusion, investors should invest with their eyes wide open.
At the least, be aware of the fees structure of the fund you are investing in:
- First, regardless of whether you make money or not, annual management fees are always charged.
- Second, some funds charge additional performance fees when the return is above some rate.