Concerns have been raised over the appropriateness of benchmarks used by some listed investment companies (LICs) to measure their performance.

A number of LICs use a cash benchmark to determine whether they will charge a performance fee, while their investment portfolio consists of Australian equities.  

"The idea behind a performance fee is that you want to pay a manager for their skill. If they have a fund that is basically long-only equites and then have a cash benchmark, that is inappropriate," Forte Investment Advisors chief investment officer Ian Lundy said. 

"In the years that the market is down, they are not going to get a performance fee and in the years when it is up they are going to get one, whether they are skilful or not," he said. "This is what I call a market appreciation fee." 

Aviva, who has recently added LICs as an investment option for its superannuation clients, recognise this as a problem.  

"When adding new super products, these products have to be approved by the trustee of a super fund," Aviva general manager wealth management products Andrew Barker said. "An appropriate benchmark is one of the things they look at."

Australian Securities Exchange-listed Hyperion Flagship Investments uses the UBS Bank Bill Index, a cash benchmark, for its equity portfolio.

However, Hyperion institutional business director Tim Samway said its use should be seen in the context of seeking absolute returns.

"Our investment process starts with the implicit assumption that we should be able to invest in equities and get a return that provides a margin over the risk-free rate over time," Samway said.

"Of course we want to do much better than that, but there is no fee if we can't outperform cash."

Samway said the company does not use an equity index, because the investment strategy is benchmark insensitive.

"All of our valuations are based on an absolute return over a five-year period," he said.