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Narrow Returns Put Brakes On Popular Contingent Fees

As the debate whether mutual funds should charge performance-based fees continues, Don Cassidy, a senior research analyst at Lipper, New York, says the main reason such fees have not caught on is that more funds underperform than overperform benchmark indexes.

In his weekly radio address, Cassidy indicated last week that only 3% of funds with about 8% of total mutual fund assets, charge contingent fees, which are fees that are linked to a performance index.

The idea is that when funds beat a certain index, these fees would go up by a certain percentage and would go down when funds lag an index. Companies such as Fidelity Investments, Boston, and Vanguard Group, Valley Forge, Pa., have more than 70 such funds, which together account for almost 90% of the assets, or about $500 million, that do charge contingent fees.

Although it sounds equitable in theory, most fund companies have not embraced contingent fees because they could draw attention to poor performance.