Updated with correction
The average large pension fund is paying out a higher proportion of its assets in investment costs than they were 10 years ago, due to allocations to new, illiquid asset classes, said bfinance.
Research by the consultant found that a move toward more illiquid investments, new premium strategies promising higher yields and unexpected pricing resilience in certain asset classes have led to higher overall fees for institutional investors.
The research, “Investment Management Fees: New Savings, New Challenges,” found that many investors have looked for fee savings through switching strategies, insourcing or by “dragging vendors back to the negotiating table.”
Data by CEM Benchmarking cited in the report showed the average total costs in its global database, which primarily covers pension funds, have grown to 57.3 basis points, up from 37.8 basis points a decade ago. “The cost increase is primarily due to asset mix changes: combined policy weights for real assets, private equity and hedge funds (alternatives) increased from 10.6% to 20.6%. Public equity policy weights declined from 56% to 44% over the period,” said Mike Heale, principal at CEM Benchmarking, in the report.
A number of asset classes and sectors have faced more fee pressure than others, and money management firms have responded by lowering costs. bfinance cited a £100 million ($128.8 million) global active equity allocation as an example, where the quoted pre-negotiation fee has fallen to 57 basis points for the period of January 2015 to March 2017, compared with 62 basis points for the period of January 2010 to December 2014.
Smart beta strategy fees have fallen even more, down 25% since 2011. Low-volatility strategy fees have fallen 24% since 2010.
However, within private markets strategies, managers often hold the “upper hand,” with fees remaining high and particularly so in infrastructure and private equity as demand outstrips supply, the report said.
Within European and U.S. core-plus and value-added real estate strategies, management fees ranged between 80 basis points and 200 basis points per year. Comparisons were not available.
“Why have certain very popular private equity managers done away with hurdle rates? The answer is very simple: because they could,” said Anne Feuillen, a senior director in bfinance's private markets division, in the report. “But this has a meaningful negative impact on net returns and reduces the alignment of interests between (general and limited partners). It is very hard for investors in this fundraising climate to say: 'no, that is a step too far.'”