Pension plans and other institutional investors are spending more on external investment management fees, even as costs on traditional investment strategies have fallen in the last five years and alternative fees are steady, according to a report from Callan Associates.
Overall expenses are up because of larger allocations to hedge funds, private equity and real estate, which command higher fees than traditional investment strategies. The average total external management fee of survey respondents was 43.7 basis points in 2012, up from 39.5 in 2008, according to the report.
External management fees now make up 90% of total fund expenses, compared with 83% when Callan started tracking the information in 1998. Funds in the survey — which includes public and corporate pension plans, foundations and endowments, and other tax-qualified plans — spent an average of 54 basis points of total assets to operate their plans in 2012. Average total expenses are up 50% since 1998, and external management fees are up 55% during the same period. Non-management external adviser fees, such as consultants, actuaries and legal counsel, are also up 115% since 1998, but only make up 5% of total fund expenses.
“Quantitative data reveals asset allocation changes are really the main driver pushing up fund expenses over time,” said Anna West, vice president, manager of published research group and author of the report. She added that plan executives are “very aware of the main issues (related to expenses) found in the survey.”
U.S. equity strategy fees have declined 14% since 2008 while non-U.S. equity dropped nearly 20%. However, domestic and non-U.S. fixed-income fees are up 12% and 54%, respectively, as plans pay more for higher yielding strategies. Hedge fund fees decreased on average to 120 basis points from 121.3 and private equity is down to 173 from 177.1, but those prices are much higher than the average 33.5 basis points for domestic equity and 24.8 for U.S. fixed income.
When asked what the biggest concern is regarding cost, the overwhelming answer from survey respondents was whether performance of actively managed funds is keeping pace with fees charged.
Callan surveyed 49 plans in April and May with $219 billion total in assets.