Swedish-registered funds have an average annual fee of 0.34% for index funds and 0.96% for actively managed funds, according to data from Morningstar. However, there are 19 small-cap funds that charge performance-based fees ranging from 10% to 20%.
While the common advice is to opt for funds with low fees, there is a case to be made for funds that significantly outperform their benchmark index year after year. In such cases, despite the larger portion of returns going to the fund manager, the investor can still benefit from substantial growth.
Fredrik Pettersson, Chief Analyst and Vice President at the Fund Companies Association, emphasizes the importance of evaluating the value proposition of funds with performance-based fees. He suggests that investors should consider not only the percentage that goes to the fund manager but also how the fund is structured to deliver returns.
It is crucial for retail investors to assess the potential return on investment when considering funds with performance-based fees, according to Pettersson. He highlights that Swedish funds typically have a high-water mark mechanism in place to prevent investors from paying for the same gains twice.
Johanna Englundh, an editor at Morningstar, raises concerns about the lack of transparency and understanding among investors regarding funds with performance-based fees. She warns that these fees can sometimes be exorbitant and may not always align with the fund’s actual performance.
A recent study by Morningstar revealed that some of the most expensive Swedish funds did not deliver impressive returns relative to their fees. For example, Carnegie’s India Fund, with a fee of 2.25%, boasted an annual return of 8.9%, but overall performance fell short. Similarly, Tundra Sustainable Frontier Fund, with a fee of 2.52%, yielded an annual return of only 3.9%.
Englundh questions the practice of comparing fund performance against bond indexes, as done by some small-cap funds like Consensus, Alcur Grow, and Strand Small Cap Fund. She argues that such comparisons may not accurately reflect the fund’s performance in the context of equity markets.
In the case of Consensus Small Cap Fund, its comparison against bond indexes has raised eyebrows among industry experts. Englundh suggests that investors should be cautious when evaluating funds that adopt unconventional benchmarks for performance measurement.
Patrik Soko, the former CEO of Consensus Asset Management, defends the fund’s use of bond indexes as benchmarks, citing historical context and risk-sharing with clients. Despite recent underperformance, Soko believes that the fund’s fee structure is fair and advantageous to investors.
Soko’s departure from Consensus marks a significant change in leadership, signaling potential shifts in the fund’s strategy and benchmarking practices. The fund is set to transition to a new fund platform next year, where it will reassess its benchmarking approach.
As the debate over performance-based fees and benchmarking methodologies continues, it remains essential for investors to carefully consider the implications of such practices on their investment outcomes. The evolving landscape of fund management demands greater transparency, accountability, and investor education to ensure optimal returns and risk management.