(Yicai) June 5 -- Under a new policy introduced in China’s southern Guangdong province, managers of government investment funds will only be allowed to collect management fees from profits, ending the practice of taking high fees from the principal even when a fund loses money.

The change, put into effect by the provincial finance department on May 31, means fund managers will not receive fees if a government fund fails to generate a profit, Hu Bo, associate professor at Renmin University’s School of Finance, told Yicai.

Until now, regulations in China did not specify where government fund management fees should come from, Hu said. In practice, they were generally drawn from the fund’s total assets, including principal.

The new approach follows the model of how private equity funds hold managers accountable for performance, and is more likely to help government funds preserve and grow capital, said Xie Zhaohuang, secretary general of the state-backed China Fund 50 Forum. Xie expects the model to be adopted by other provinces and cities.

Management fees are payments made by fund owners to managers and are usually their primary source of income. The fees cover day-to-day operations and are generally calculated as a percentage of the amount invested, normally around 1 percent and not more than 3 percent.

Hu expressed reservations about the new policy. "If an investor appoints a fund manager, he should be prepared to pay a reasonable management fee to cover legitimate operating costs,” he said.

The new policy forces fund managers to do their job well if they want to earn more money, Xie noted, with those who mainly rely on management fees to make a living gradually weeded out. If they cannot earn their fee, it proves they are not qualified to manage the fund, Xie added.

Editor: Kim Taylor