By David Hoffman
PHILADELPHIA — Action taken this month by regulators makes it harder for mutual fund advisers to rationalize charging performance-based fees, according to several industry experts.
That is a shame, because such fees, which go up or down depending on a fund's performance, can benefit investors, some of those observers say.
"They align management incentives with investor results," said Russel Kinnel, director of mutual fund research at Morningstar Inc. in Chicago.
But performance fees are unusual for mutual funds.
Of the thousands of mutual funds, just 348 — including multiple share classes — have performance fees, according to Lipper Inc. of New York.
The latest episode to suggest such fees might not be worth the trouble for managers came Sept. 8 when the Securities and Exchange Commission announced five fund managers had paid more than $7 million in reimbursements for excessive performance fees.
The Dreyfus Corp., New York paid $3.2 million; Putnam Investments, Boston, $1.6 million; Numeric Investors LLC, Cambridge, Mass., $1 million; Kensington Investment Group Inc., Orinda, Calif., $790,962; and Gartmore Mutual Fund Capital Trust, which does business as Gartmore Global Investors Inc., Conshohocken, Pa., paid $653,882.
The SEC also censured the firms and ordered them to cease and desist improperly charging the fees.
What exactly did the mutual fund managers do wrong?
According to the SEC, they didn't use the proper periods for calculating the performance fees.