Institutional investment management fees on average rose in 2002, despite continuing market depreciation of assets.
The average management fee for a $50 million separately managed account rose in six of the nine asset classes analyzed by Pensions & Investments from eVestment Alliance LLC data. They were large-capitalization core equity; large-cap value equity; small-cap core, growth and value equity; and emerging markets equity.
Average fees for large-cap growth, U.S. core fixed income and international equity dropped modestly.
With performance in most major asset classes remaining firmly in negative territory as of Dec. 31, plan sponsors and endowment and foundation managers have a huge incentive to pay closer attention to fees, said John T. Griswold, at Commonfund, Wilton, Conn.
"With a 10% to 12% decline in assets, every basis point counts. If we continue in this choppy market, there will be more pressure on fees," Mr. Griswold said.
Fees and costs have such a huge impact on performance that they comprise 25% of the criteria consultant Ennis Knupp + Associates Inc., Chicago, uses for rating money managers, said Steve Voss, principal and head of fixed income.
Ennis Knupp has negotiated "most-favored nation" fees - which guarantee under most circumstances that all clients will be charged the same fees for portfolios of the same size - with most managers used by its institutional client base, Mr. Voss said. That fee structure makes it hard for money managers to drop fees when asked by one client, because the fee would have to be dropped for all clients using that strategy, said Don Rogers, chief executive officer of CRA Business Strategy Group, New York, a vendor consultant.
"A recalculation of fees to keep or gain assets isn't important only in how it impacts one client, but in how it impacts all clients. If you drop fees for one, you have to drop it for every one. (Doing this) is a big deal for asset managers," Mr. Rogers said.
Mr. Voss and others interviewed said there is little pressure on money managers to cut fees. Some consultants say, however, that poorly performing managers, fearful of termination, have offered deals to their clients. Mr. Voss said managers sometimes will approach a client and offer investment services for half the fee for a pre-determined time in order to retain the assets in the face of bad performance.
In one recent example, the $430 million City of Tampa (Fla.) General Employees' Retirement Fund was considering what to do about a poor-performing, $60 million active, managed by Fidelity Investments, Boston, said Paul M. Broughton, the fund's accountant.
Fidelity offered to switch to a performance-based structure that would result in lower fees if performance did not improve, Mr. Broughton said. Trustees didn't accept Fidelity's offer, and terminated the company.
As part of an asset allocation shift, the money was moved to a new asset class, international equity, and two managers were hired: Mercator Asset Management LP, Fort Lauderdale, Fla., for passive management; and Fisher Investments Inc., Woodside, Calif., for active management. A Fidelity spokeswoman wouldn't comment on the termination except to say, "We continue to enjoy a relationship with the City of Tampa managing another mandate" she wouldn't identify. (Money Market Directory lists Fidelity as a domestic bond manager for Tampa.)
Some believe fees are too high. Edward A.H. Siedle, president, Benchmark Financial Services, Lighthouse Beach, Fla., said all of the 25 public pension funds his firm has audited "were overpaying their managers."
Data from PIPER, a manager performance database owned by P&I, show an enormously wide range of fees within common asset classes.
The widest spread is between active small-cap growth equity managers. Roger Engemann & Associates Inc., charges 270 basis points for a $100 million small-cap growth account - the highest fee shown. Fifth Third Bank Investment Advisors, by contrast, has the lowest fee - 29 basis points for the same size portfolio. The average fee is 80.1 basis points, according to PIPER data.
The ranges of fees, in basis points, for an actively managed $100 million account in other asset classes are:
* Large-cap growth equity: 100 maximum, 10 minimum, 48.8 average;
* Small-cap value equity: 125 maximum, 40 minimum, 78.8 average;
* Large-cap value equity: 100 maximum, 20 minimum, 45.3 average;
* Indexed domestic equity: 35 maximum, 7 minimum, 16.1 average;
* High-yield bonds: 100 maximum, 25 minimum, 45.8 average; and
* Intermediate fixed income: 55 maximum, 19 minimum, 24.8 average
But fees don't often mean that much to plan sponsors until the end of the search, said CRA's Mr. Rogers.
"Fees are not often a criteria for manager selection. Pricing is almost the final piece of the hire. It only becomes important once you've whittled down the universe so that all other things are equal," Mr. Rogers said.
Ted Disabato, consultant and president of Disabato & Associates, Chicago, agreed. "You can end up being penny-wise and pound-foolish if you choose managers based on price or try to negotiate too hard with them. We don't push managers too hard because we want them to have the resources they need to manage money as well as they can," he said.
Commonfund's Mr. Griswold said the "very best managers won't break on fees because they don't have to."