Starting next year, Janus Capital Group Inc. is rolling out a performance-based fee system that links fees paid to fund managers with fund performance.
Fund managers would earn higher fees when they outperform the market and their peers. Conversely, they’d be paid less when their funds lag their benchmarks.
“You are paying for performance,” said Shelley Peterson, a Janus spokeswoman. “If a (fund) underperforms a passive index, you should pay less.”
Janus first announced the plan in September, and approved it earlier this year.
“Funds need something to differentiate themselves now that expenses are scrutinized by investors,” said Dan Sondhelm with SunStar, a mutual fund consultancy based in Alexandria, Va. “It’s a great way for (Janus) to differentiate itself if they can beat the market. It’s good for them.”
Most mutual fund companies charge investors a fee based on the percentage of total assets invested in a specific fund. The average stock fund fee in 2003 was 1.25 percent, according to Investment Company Institute, a trade group.
Janus, the Denver-based mutual fund giant with $150 billion under management, plans to use performance fees for 13 of its funds, including three of its largest, Mercury, Contrarian and Worldwide. The publicly traded company, founded in 1969 and well-known for its “growth” style of investing, has a market capitalization of $4.9 billion.
Depending on the fund and its performance, Janus will charge investors management fees between 0.35 percent and 0.79 percent on those 13 funds. Those fees do not include other administrative expenses charged by Janus.
Currently, the fees on those funds range from 0.50 percent to 0.64 percent.
Janus will determine the performance fees according to a three-year rolling average, a system designed to avoid charging new investors for gains they’ve missed, Peterson said.
Janus is one the nation’s few mutual fund companies that has announced plans to use the performance fee structure. Fidelity and Vanguard are two others.
Just 470 of the nation’s 4,185 stock funds use performance fees, according to Lipper Inc., which has its research division based in Denver. Only 10.5 percent of the $5.7 trillion managed by U.S. mutual funds use performance fees, it reports.
Performance-based fee systems are more commonly used by hedge funds, which typically make riskier investments and cater to larger investors.
However, at least one money management company was recently forced to return money to investors after regulators discovered funds had overcharged investors or miscalculated performance fees, said Don Cassidy, a senior researcher at Lipper.
Portfolio managers using incentive fees tend to take on more risk than traditional funds, especially after times of poor performance, according to a 2003 study by two New York University finance professors.
“The sophisticated investor is better off buying funds with incentive fees than buying funds with no incentive fees,” according to the study.
“However, investors should realize residual risk is higher with these funds.”
Staff writer Will Shanley can be reached at 303-820-1260 or wshanley@denverpost.com.
