Just 48 per cent of trusts now charge the fees, under which investors give back a certain proportion of their returns if the manager beats the trust’s benchmark, while 47 per cent do not, according to data from trade body the Association of Investment Companies (AIC) and Morningstar.
In the past two weeks alone, three trusts have abolished the fees as criticism of active investment managers’ remuneration structures has reached fever pitch of late.
Performance fees in particular have been criticised, with opponents arguing investors should be able to keep all of their returns because they are already paying annual management charges for investment services.
The fees are now almost extinct on open-ended retail funds.
Peter Walls, manager of the Unicorn Mastertrust, which invests in other investment trusts, said performance fees would become a “thing of the past”.
Paul Locke, an analyst at Investec, said the fees “are less viable or wanted these days”.
The numbers of trusts with and without the fees does not equate to 100 per cent because 5 per cent of trusts have unusual structures – such as on Alliance Trust, where the investment manager is part of the trust itself.
The AIC said the current figure of 48 per cent of trusts with performance fees compared with 54 per cent in January 2010.
The £167.7m JPMorgan Chinese Investment Trust, the £227.3m Pacific Assets Trust and the £725m Fidelity European Values have all culled the fees in the past two weeks.
Last year 10 per cent of all investment trusts changed their fee structures, with 12 abolishing performance fees.
James Burns, investment trust specialist at Smith & Williamson, said trusts launching with performance fees were “going the wrong way” unless they were doing something esoteric in nature.
However, not all experts agreed and some thought that performance fees, if structured properly, were important and should remain a part of the industry.
James Carthew, research director at investment trust research firm QuotedData, said there seemed to be a “rush to scrap performance fees”, but it “isn’t something we necessarily agree with”.
“It seems sensible to us to incentivise your manager to do the best they can for you,” he said.
Mr Carthew advocated the use of “high watermarks” on performance fees – a system under which the investment manager could not easily receive the fees if it had failed to perform in the past. He also thought the fees should be capped, and an appropriate benchmark be used to measure performance.
Some trusts have said they scrapped performance fees amid fears that investors did not understand them. Mr Carthew said this was a “spurious” argument.
“Investors are perfectly capable of understanding performance fees if they are explained clearly,” he said.
Simon Elliott, investment trust analyst at Winterflood Securities, said if a trust was trying to appeal to a large audience, then it would want to make its fee structure “as simple as possible”.
The trend of scrapping fees is unlikely to cease though. The £1.2bn Electra Private Equity investment trust is also reviewing its fee arrangements.
Stephen Peters, investment trust analyst at Charles Stanley, said: “The best I can say is that I hope they keep disappearing.”
Performance fees – should they stay or should they go?
The investment trust trade body has stated it remains “neutral” on the issues of whether trusts should charge performance fees or not.
The AIC said a well-designed performance fee could “align the fund manager’s interest with shareholders”.
Neil Woodford said this was his aim with the structure of the performance fee for his planned trust, which would see him get more shares of the trust if it was successful, rather than charging investors directly. However, more conventional performance fees are still being considered by new trusts.
Last year River and Mercantile launched a micro-cap trust for manager Philip Rodrigs. It has an estimated ongoing charge of 1.25 to 1.5 per cent and a performance fee of 15 per cent of any outperformance of the Numis Smaller Companies excluding Investment Trusts plus Aim index.
