Asset owners continue to apply pressure on external manager fees, with new data showing substantial fee reductions across a number of asset classes, according to research carried out by bfinance.
Figures are based on real fees being quoted by asset managers for real mandates – not surveys or ‘rack rates’ which tend to be inflated.
bfinance says this fee compression is being driven by factors including the rise of cheaper competitors, increasing transparency on costs and expansion of the manager universe. Price competition in asset management is relatively inefficient and investors can use a range of tools to improve value for money. Above all, investors should not focus on ‘low cost’ at all costs: net returns are the priority. These are the key findings of the latest report from bfinance “Investment Management Fees: Is Competition Working?
Fees for active Global Equity mandates have fallen by 7 per cent since 2013 and 4 per cent since 2016. Median quoted fees for a USD100 million mandate currently sit at 55bps, with reductions particularly notable for the lower quartile, which has fallen from 51bps in 2013 to 46bps in 2016 and 42bps in 2019.
Larger reductions are visible in Global Emerging Market equities with fees down 13 per cent since 2013 and 6 per cent since 2016. The median quoted fee for a USD100 million mandate is now around 74bps, with considerable scope for downward negotiation. bfinance’s first published fee data on China A-Shares shows very high dispersion, as one would expect from a relatively immature sector, and no evident correlation between fees and quality.
Emerging market debt pricing, which proved exceptionally resilient until 2016, is now falling with a subsequent 10 per cent drop in median quoted fees. The last three years have seen a swing in favour of investors, whose position was strengthened by last year’s outflows.
Maturation of the unconstrained bond sector has brought fees down by 15 per cent. Initially, strong demand and a heterogeneous universe supported strong pricing, with diversity of manager/strategy type inhibiting comparison. Yet the maturation of the sector has brought a decline in median fees.
The post-GFC decline in Funds of hedge funds pricing continues. Substantial reductions were revealed in the 2017 Investment Management Fees paper and the trend has continued, with median fees falling to 58bps during the 12 months to June 2019. There continues to be a significant differentiation between European and US FoHF with the latter still quoting substantially higher fees. Pricing pressure has also led to consolidation within the asset class with a 12 per cent reduction in the number of managers.
Although we have seen reductions of up to 25 per cent in some Alternative Risk Premia strategies, median quoted fees have remained at 65bps between 2016 and 2019 due to the heterogeneity of the universe. In Multi Asset, fee pressure is somewhat inhibited by the huge diversity of strategies available although there is greater pricing pressure in the more “commoditised” segments (e.g. traditional balanced).
It is challenging to unpack pricing movements in private markets due to the complexity of fee structures, such as where falling management fees are offset by lower hurdle rates. There is evidence of declining fees in certain asset classes such as European Core Open-Ended Real Estate (fees down 12 per cent) and US Direct Lending strategies targeted at non-US clients (median management fees down >20 per cent). Overall, fund managers in private markets have been under less pricing pressure than their public market counterparts due to a strong fundraising climate.
Fee trends can open the door to fee reviews and renegotiations. Yet this is far from the only tool in the investor’s arsenal when it comes to obtaining better value for money and improving efficiency.
Mandate consolidation can be an effective method, although the savings achievable through larger ticket sizes differ substantially by asset class and quantum. For example, fee savings tail off significantly for Global Unconstrained Bonds above the USD150 million mark, whereas Global Equity investors continue to achieve notable discounts with each USD100 million added.
New developments in manager performance analysis can be immensely helpful in assessing and renegotiating fees. More precise attribution using the manager’s risk factor exposures clarifies alpha generation. Adopting different fee structures can be helpful, though performance fee structures should be handled with considerable caution and the majority of bfinance’s clients continue to prefer fixed fees for public equity and bond managers. Finally, investors should consider whether their manager selection processes maximise competition between managers, setting the client up as ‘price maker’ rather than ‘price taker.’
Mal Hunt, Managing Director and Head of Portfolio Solutions, says: “Falling fees in particular asset classes can represent a potential opportunity for investors who appointed managers several years ago to re-evaluate their spending. Improving value for money continues to be a huge priority among the pension funds and other asset owners we work with. We have seen a big increase in demand over the last year for more granular, tailored fee benchmarking from investors that are looking to understand whether they’re actually getting value for money and, where relevant, renegotiate fees or replace managers. It is crucial not to analyse costs at an overly superficial level and instead consider the whole picture including hidden costs, performance attribution, the overall leakage in complex fee structures and more. It is also crucial to remember that long-term net return, not cash spent, is the most important metric.”
Kathryn Saklatvala (pictured), Head of Investment Content, says: “The reductions in average fees across various asset classes are welcome news for investor clients. These are driven by a range of factors depending on the asset class, such as an expanding manager universe, a reduction in return expectations, the development of cheaper alternative products, improving visibility on costs and more. Yet there are still significant barriers to price competition across the asset management industry, such as a lack of visibility on actual fees or total costs, or the reality that manager selection methods may not facilitate and maximise competition on pricing. While there are some interesting developments taking place, such as the Cost Transparency Initiative in the UK, investors will only benefit if the data is sufficiently granular and specific.”