The possibility of being hit by a performance fee is just one – perhaps the most confusing – of the various cost issues that need to be considered by managed fund investors. The others are upfront and exit fees, management fees, including administration costs, and the so-called buy-sell spread.

Upfront fees can be avoided by using a discounter, such as InvestSmart or YourShare, but there is no way around paying the annual management fee.

The best you can do is to opt for a fund with a low fee. While prioritising fees is rarely sensible, Morningstar’s research found, based on its sample, the management fee was the major contributor to fees in 83% of cases. The performance fee was much less important.

All the experts interviewed here stress the need to look at a fund’s performance fee in the context of its management fee. “If a fund has a performance fee its base annual fee really should be set to recover its costs, so any profit is linked to performing well,” says Whitelaw. As a rule of thumb this points to a base management fee of 0.5% or so.

This fee is often expressed as a fund’s management expense ratio or MER, shown as a percentage of a fund’s assets. The MER of retail share funds that don’t have performance fees is usually around 1.5%pa.

Another measure is the indirect cost ratio or ICR. Also shown as a percentage of the value of your investments, this not only incorporates the costs covered by the MER but also takes account of its most recent performance fees.


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