Liontrust absolute return fund cut from Wealth 150

Hargreaves Lansdown has removed the Liontrust European Absolute Return fund from its Wealth 150 ‘buy’ list and used the move to renew an attack on funds charging performance fees.

The £29.3m fund, run by James Inglis-Jones (pictured) and Gary West, was the worst performing product in the IMA Absolute Return sector over 12 months to January 10, losing 9.6 per cent.

Investment analyst Richard Troue said Liontrust - as well as other managers - had “proved unwilling” to amend its fee structure, which charges 20 per cent of any outperformance of Libor. Hargreaves Lansdown has long called for fund managers to stop using performance fees.

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“Historically Libor has generally been higher than the rate of inflation, meaning a manager would need to deliver ‘real’ returns before a performance fee could possibly be charged,” Mr Troue said.

“In the aftermath of the financial crisis interest rates have remained extraordinarily low, and are significantly below the rate of inflation. This means funds can still charge a performance fee even if they have failed to keep pace with inflation provided they have beaten Libor.

“We believe it is time for the fund management industry to reappraise this type of fee structure. We have made this point to Liontrust, and other fund management groups, but so far they have proved unwilling to amend the fees or the associated benchmarks.

“Fees of this nature are commonplace in the absolute return sector. We do not think it is right that investors could pay a performance fee for a fund that has failed to match inflation.”

Mr Troue added that the recent rally in European stocks had been driven primarily by monetary stimulus, meaning the managers’ cashflow-based investment process was not in favour.

Mr Inglis-Jones and Mr West analyse company balance sheets and take long positions in companies that have strong cashflows, and short positions in those that have weaker cashflows.

The managers recently removed short positions from the fund in attempt to improve performance, but Mr Troue said the fund could still struggle in the short term.

However, Mr Troue added that investors should not simply sell the fund as the managers “have had periods of good performance in the past and could do so again in the right environment”.