Active equity and bond managers are cutting fees on some institutional strategies, joining their more costly alternative investment management counterparts in offering savings to belt-tightening pension funds.
And this might be just the beginning: A protracted period of low returns would increase pressure on investment managers — especially those without consistent outperformance — to reduce fees.
Factors such as maturing pension funds' need to use returns to pay benefits instead of reinvesting them, aggregation of asset owners and competition among managers for declining asset pools are also putting pressure on mainstream managers to cut fees.
While some managers are more willing to renegotiate fees, others are opening investment shops that cite low fees as a differentiator designed to win institutional business.
Institutional investors that have trimmed external equity and bond manager fees include the 3.5 trillion Norwegian kronor ($608 billion) Government Pension Fund Global, Oslo; the £4.5 billion ($7.2 billion) Pensions Trust, Leeds, England; and the £2.3 billion Leicestershire County Council Pension Fund, Leicester, England.
Some U.S. public pension funds, including the $237.3 billion California Public Employees' Retirement System and the $152.2 billion California State Teacher's Retirement System, have been renegotiating fees since 2010 (Pensions & Investments, July 26, 2010).
But consultants caution that fee declines to date in mainstream asset classes have been minimal, and that good managers that can deliver strong performance will be able to charge reasonable fees in almost any environment.
All-in industry fees — covering everything from custody and consulting to legal fees, the largest of part of which are asset management and trading costs — have risen 43% to 100 basis points in the past five years, according to Chris Ford, head of investment for Europe, the Middle East and Africa for Towers Watson & Co., London. Greater use of alternatives drove increases before the financial crisis, but since then transaction costs have been the culprit.
“That's a barely believable number in a high-growth world. If we're in a low-growth world, a more cost-pressured world, I don't believe the industry can sustain a 100-basis-point cost structure. Something's got to change there,” Mr. Ford said at a conference in March.
In October, the giant Norway fund, which invests proceeds of the sale of the state's petroleum reserves, announced it would cap performance fees of external managers at $25 million. Last month, the fund announced it had cut externally managed assets by $23 billion in the year ended Dec. 31.