October 3, 2017 / 11:37 AM / a year ago

Fidelity International to cut fees if active funds lag indexes

LONDON (Reuters) - Asset manager Fidelity International said on Tuesday it will set a new pricing model for its active equity funds that will charge investors lower management fees if a fund underperforms or simply tracks its benchmark.

The move comes as fund managers who actively pick stocks and bonds face pressure on fees from cost-conscious investors and regulators who question the value of investing in these funds compared with lower-cost index-tracking funds.

Britain’s regulator the Financial Conduct Authority said in a market study earlier this year that the asset management industry’s profits were persistently high and suggested the average client may be short-changed.

“We have listened to the criticism of the asset management industry and rethought our approach to charging clients,” Fidelity International President Brian Conroy told reporters.

“In the future we believe the vast majority of funds will charge on a variable basis as well.”

Conroy said the company would discuss its plans with clients and regulators in the coming weeks and months, although he hoped the first new share classes using this fee structure would be available to clients in early 2018.

Fidelity, which currently manages around $180 billion (135.86 billion pounds) in assets in active and index-tracking equity funds, said the new fee structure will be introduced globally across its equity fund range.

The changes would see the management fee, which is charged annually as a percentage of assets invested, set on a sliding scale. Where a fund beats its benchmark, net of fees, the management fee will rise. If it meets or lags the benchmark, the fee falls.

Given the breadth of its current fee range and a need to model the impact of the changes and talk to clients, Fidelity said it could not give firm guidance on the specifics of its pricing scale.

Fidelity also said it would pass on the costs of investment research to clients under the European Union’s new market rules, called Mifid II, due to go live in January, bucking the trend set by many regional peers who have decided to absorb the costs.

It said the reduction in base management fee for its active equity funds would exceed and offset the cost of the research.

“Fidelity’s approach is fairly unique and original, differing from that of many of their peers who have chosen to absorb research costs within their businesses,” said Adrian Lowcock, investment director at Architas.

“The introduction of a new share class obviously creates more complexity in the short term but in doing so Fidelity are playing the long game.”

Additional reporting by Huw Jones and Kit Rees; Editing by Rachel Armstrong, Greg Mahlich

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