"Earn money to collect management fees, no earnings then refund" becomes a reality.

Recently, Nanfang Ruihe San Nian returned over 32 million yuan in management fees to the fund assets due to not achieving a positive return in the previous closed period, sparking market discussion. In fact, this is not the first product in the industry to "work for free" due to not meeting performance standards. Across the entire industry, a downward trend in fee rates has become the main melody, and public fund managers have made many innovative explorations in this area.

Should management fees be charged for funds that incur losses? Behind the heated discussion is the questioning and dissatisfaction of investors with poor investment experiences towards the public funds that rely on management fees for guaranteed income. In the view of industry insiders, protecting investor interests relies not only on the ethics and awareness of managers but also on the continuous optimization of the interest distribution mechanism. Only by creating value can it be shared; fund companies need to improve their investment research capabilities and service quality.

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"No management fees if no earnings"

Recently, Nanfang Fund announced that Nanfang Ruihe San Nian has entered a new open period starting from September 6th, but due to not meeting performance standards, it will return the management fees for the past three years to the fund assets on September 5th.

As a fund with a tiered fixed fee rate, Nanfang Ruihe San Nian is an innovative exploration of fee rate reform in the industry, that is, "collect management fees only when earnings are made, and not more when earning more." The fund contract stipulates that on the last day of each closed period, if the net value of the fund shares at the end of the period is less than or equal to the initial net value, the management fees from the previous open period will be fully returned to the fund assets. That is to say, the fund company can only receive compensation for its labor when the product has a positive return during the closed period.

Wind data shows that as of September 5th, the cumulative unit net value of Nanfang Ruihe San Nian is 1.5799 yuan, lower than the initial net value of 1.7456 yuan on September 15, 2021. In terms of performance, the interval return of Nanfang Ruihe San Nian is -9.75%, outperforming the performance comparison benchmark by 5.27 percentage points.

So, how much management fees does this product need to return? According to regular reports, the total management fees for this product from the second half of 2021 to the first half of 2024 are 34.471 million yuan. In July of last year, the product reduced the management fee from 1.5% to 1.2%. Estimating based on the average management fee for the half-year period at that time, the management fees for Nanfang Ruihe over the past three years are approximately 32.77 million yuan. It should be noted that since the operating time of this closed period product is not a complete half-year interval, this estimated data may have some error.

"In recent years, the market has continued to decline, leading to a continuous drop in net value, and the investor experience has been very poor, with doubts about the rationality and necessity of management fees. As one of the representative products of the industry's pilot floating management fees, Nanfang Ruihe San Nian has fulfilled the agreement of the fund contract to return the management fees, and it is natural that it has attracted attention," a fund industry analyst told the First Financial Daily reporter.

In fact, this is not the first product in the industry to "work for free" due to not meeting performance standards. On September 6th, Dongfanghong Industrial Upgrade announced that due to a return rate of -21.19% from September 6th last year to this year's September 6th, the applicable management fee rate for the daily interval this quarter is 0.According to First Financial Daily, in addition to the aforementioned products, public fund managers have already explored many approaches in the management fee area. For instance, they have suspended the collection of management fees during periods when the net value of fund shares falls below the income growth line, implemented automatic liquidation triggered by targets with no management fees if the cumulative returns are less than 3%, and there are a considerable number of existing funds with floating management fee rates.

So-called floating management fee funds are a type of management fee charging method that adjusts based on specific conditions, including the duration of investor holding, the product size of the fund, or performance.

Taking a product linked to performance as an example, the fund management fee consists of two parts: a basic management fee and a performance reward, with 50% being a fixed management fee and the other 50% being a contingent management fee. On the last day of each closed period, if the end net value of the fund shares is less than or equal to the initial net value, the contingent management fee for that closed period is fully returned to the fund assets.

In the view of industry insiders, the design concept of floating management fees aims to bind fund managers with fund holders from an interest mechanism, enhancing the positive effect of "shared benefits and shared risks" between investors and fund managers. However, looking at the phased results, the performance of the products has not been as impressive as expected.

Wind data shows that, as of September 9th, there are currently 142 products in the market that charge floating management fees (only counting initial funds, the same below), including 72 actively managed equity products. Among the actively managed equity products with data for nearly three years, the Jing Shun Great Wall Value Leader Two-Year Holding Period and the Hua An Securities Huiying Zengli One-Year Holding A have positive interval returns, at 38.31% and 10.2% respectively. In contrast, the product with the largest loss, Everbright Sunshine Smart Manufacturing A, has accumulated a decline of 60.57% over the past three years.

Should loss-making products be charged?

In recent years, the A-share market has been lackluster, and the performance of public fund products has not been impressive either. Wind data shows that the equity mixed-type fund index (885001) has already reaped six consecutive "semi-annual bear lines," with a cumulative decline of 41.81% as of September 6th.

Therefore, even with preferential rates, investors' dissatisfaction is continuously accumulating amidst the expanding fund losses. Especially, the majority of three-year products issued in 2021 have seen their performance "fall off a cliff," leading investors who "watch their product losses grow larger but cannot stop the loss" to have an increasingly poor experience, and they raise the question: Should loss-making funds still charge management fees?

After communicating with several investors, First Financial Daily reporters found that opinions can be roughly divided into two categories: "only those who make money are qualified to charge" and "if you think you can only make money and not lose, you should not buy funds." "By entrusting money to professionals for management, we hope to make a profit. So the question is, if we suffer losses, why can they still make money?" One investor, Xiao Kai (a pseudonym), believes that the premise of charging management fees should be to make money for investors.

Xiao Kai further stated that fund companies charge management fees based on the scale of assets, regardless of whether fund holders make money, fund companies can receive a fixed percentage of management fees. This also means that the interests of the managers and investors are not tied together, and the concept of investor interests first has not truly been implemented."If an investment product incurs losses, it does feel emotionally unfair for the institution to charge management fees, but investing comes with risks," said Xiao Wen (a pseudonym), an investor with years of investment experience. They believe that institutional investments also require corresponding operational and labor costs, so charging management fees is also understandable.

"If the fund's performance cannot be reversed, simply reducing fees will not change the overall bottleneck," a fund industry insider in South China told the reporter. Lowering fees to give benefits cannot dispel investors' concerns about expected investment returns. However, from the perspective of correct values or emotional guidance, it is indeed a good thing that caters to investors' emotions.

"The key is the product design; if the fund contract stipulates what it is from the beginning, it should be followed accordingly," they believe. If investors are more inclined towards products with a floating management fee model, many companies also have such product layouts, and investors can flexibly choose according to their wishes.

A fund industry insider in Shanghai believes that for investors, the floating fee rate model does indeed make them feel "more reasonable," especially catering to investors' grievances of "why should I pay when the fund incurs losses." However, in essence, the difference between a fixed fee rate and a floating fee rate is nothing more than a shift from the current bull and bear market "guaranteed income" model to a model that charges more in a bull market and less in a bear market.

Fee reform continues

Public funds have always relied on management fees for guaranteed income, which has always been a concern for investors. After the establishment of fund products, due to various costs involved, management fees and other expenses are charged regardless of whether the fund makes a profit or not. Management fees are also the main source of income for fund managers.

In July last year, the reform of public fund fees was initiated, with the management fee rate for actively managed equity funds reduced to 1.2% and the custody fee rate reduced to 0.2%. Gradually, low-fee products such as money market, bond, and index funds also took the initiative to lower their management or custody fee rates, making downward fee rates the main theme.

According to incomplete statistics from First Financial Daily reporters, as of September 9, compared to the data before the fee reform, the number of fund companies that have taken action to reduce fees has increased to 153, involving more than 3908 fund products (only counting initial funds), accounting for 36.63% of the industry's total. Looking at the adjustment list, nearly 90% of actively managed equity products have implemented fee reductions.

As of the end of the second quarter of this year, public funds collected a total of 61.448 billion yuan in management fees in the first half of this year, a decrease of 9.618 billion yuan compared to the same period last year, with a decline of 13.53%. In addition, more than half of the fund companies have seen a decline in management fees to varying degrees, with 29 companies experiencing a reduction in management fee income of more than 100 million yuan.

In recent fee reduction plans, there are also multiple public funds such as Huaxia Fund, Huabao Fund, and Bosera Fund that have reduced the fund subscription and redemption fee rates for their related products. Some fund redemption fees are even directly exempted for those who meet certain conditions.In the view of industry insiders, the essence of these explorations of fee rates is to optimize the fund investment environment, ultimately meeting the needs of investors and enhancing the investment experience. "No matter which method is used, whether the product can be accepted by investors still depends on the investment level of the fund manager and the performance of the fund's returns," the aforementioned person from South China told Yicai.

Why do the vast majority of public funds adopt a fixed management fee model instead of a performance-based fee model? "There are complex considerations behind this," explained the aforementioned fund industry analyst. If the majority of products adopted a performance-based fee model, where management fees are refunded in the case of losses, it might induce fund managers to be more aggressive in their investment management and company operations, ensuring that the company earns enough during systemic market opportunities to ensure normal operation during bear market years. This would inevitably exacerbate market volatility.

On the other hand, such an operational model could also lead to small and medium-sized institutions in the industry losing all room for survival, thereby intensifying the Matthew effect at the top and even a certain degree of monopoly. "These issues are both referenced by overseas cases and deduced by business logic. Perhaps the fixed fee model of public funds is not perfect, but it is more beneficial than the performance-based model," he said.