Performance-related fees fail to deliver out performance and simply impose extra costs on investors, according to a recent report by Grant Thornton.

The accountancy firm found that more than 45 per cent of mainstream investment trusts - companies which invest in the shares of other companies -  now charge performance-related fees, whereby the investment manager is rewarded for beating a certain benchmark or increasing a trust’s net asset value.

This is an increase from 2000 when only one in three investment trusts levied performance charges.

Although fixed annual fees tend to be reduced when incentive fees are introduced, Grant Thornton found that on the whole, performance fees had led to higher fees overall.

In addition,  the report found that investors received nothing in return for paying higher investment fees, indicating investment managers fail to generate higher returns just because they are incentivised.

Pascal Dowling, publisher of Trustnet (www.trustnet.com) says: “Obviously these vehicles have a reputation for being cheaper overall than unit trusts, so it is a shame if they spoil the goodwill they’ve got by upping their fees without producing the returns that justify those fees. But the same applies to any investment vehicle.”

A representative sample of trusts analysed by Grant Thornton between 2003 and 2007 found that, on average, trusts without performance related fees had produced slightly higher returns than those that did have them.

 Grant Thornton concludes that “the principal effect of performance fees has been to increase financial returns to the management  companies.”

In addition, two thirds of performance fee structures did not involve a so-called ‘high water mark ‘ minimum level of attainment,  meaning that the manager could be paid extra simply for returning a trust to its high point prior to a slide in its net asset value.

The only benefit of performance related fees for investors which Grant Thornton could identify was that they tended to help with the retention of certain fund managers. But otherwise, the report makes disappointing reading and Grant Thornton urged investment trust boards to ask themselves why they maintained performance fees  when they were failing in their original aim.

For more on investment trusts’ performance figures visit:
http://www.find.co.uk/my_find/pic/tn_investment_trusts

Read our guide:
http://www.find.co.uk/investments/funds&trusts/investment_trusts_guide