Callan: External manager fees continue to climb in move to more alternatives

External money management fees — which make up the overwhelming majority of the cost of running a pension fund, endowment or foundation — increased 18% in the past three years, a Callan Institute report said.

The survey, completed in early 2016 by 85 asset owners representing $409 billion in assets, reflects fund costs in 2015 and is the first such survey conducted since 2013, which reflected 2012 data.

The total cost of running their funds — expenses relative to total fund — rose to an average 63.3 basis points in 2015, up 16% from 54.4 in 2012. In the original 1998 survey, respondents had said the cost was 35.6 basis points.

External money management fees rose to 51.7 basis points in 2015 from 43.7 basis points in 2012 and make up an average 93.1% of total fund expenses, rising gradually from 83% in 1998, the report said. Other external advisers, such as consultants, make up 2.5% of total expenses, while custody makes up 1.9%, total investment-related staff compensation makes up 1.3% and other various expenses taking up 1.2%.

The report cited greater allocations to alternative asset classes as a primary driver for higher external money management fees. Eighty-four percent of respondents, for example, said they invested in hedge funds in 2015 compared to 37% in 2012, and 89% of respondents said they invested in private equity in 2015 compared to 57% in 2012.

Whether performance of actively managed funds justifies the cost was cited as the most relevant concern by respondents. On a scale from zero for not relevant to six for very relevant, the average respondent's answer was 5. Following that at 4.5 was “market volatility and/or conditions.”

Meanwhile, new regulations are having a greater impact on expenses than three years ago, respondents said. Forty-one percent said regulations have increased operational expenses in 2015, while 23% said so in 2012. Risk management efforts, however, have affected operational expenses less in 2015 (33%) than in 2012 (42%).

Smaller funds overall have to pay a premium, with funds with fewer than $1 billion in assets paying an average 72.9 basis points compared to funds with more than $3 billion in assets at 53 basis points.