U.K. pension funds are paying money managers up to 70% more than in 2011 in some asset classes, with fees for global equity and U.K. real estate management in particular rising over the period, said Lane, Clark & Peacock.
The consultant’s latest LCP Investment Management Fees Survey Report, published Monday, said fees in global equities and U.K. real estate have risen “significantly faster than inflation” over the period between 2011 and 2017 but are in line with the increase in equity markets.
For an active global equity allocation of £50 million ($62.3 million) that had delivered a benchmark-like return, investors could be paying 70% more in fees than in 2011. LCP said this jump was largely driven by the increase in equity markets. “Equity returns, and hence the asset value of the portfolio, have far outstripped inflation in the past six years, leading to a big fee increase overall,” the report said.
Of the median fee rates for the 21 most popular asset classes covered by the survey, 13 had fallen vs. figures in 2011, eight increased and one remained unchanged.
The report also noted there was no noticeable link between charging a higher fee and delivering better performance than the markets. “For several years, our survey has highlighted that active managers are primarily rewarded to retain client assets, and not necessarily to achieve outperformance,” the report said. “There is, therefore, a danger that investors are rewarding mediocrity.” This could be remedied with “a well-structured performance fee or even a flat-fee.”
“Investment managers have done very well out of increases in assets under management over recent years,” said Matt Gibson, partner and head of investment research at LCP and author of the report, in an accompanying news release. “However, this has been driven primarily by general rises in equity and bond markets. Whilst we welcome the reduction in fee rates in many asset classes, overall, investment managers are charging much more but don’t seem to be doing more. Our findings highlight just how important it is for pension schemes to regularly monitor their investment managers and put negotiating pressure on them to reduce fees.”
The report surveyed 126 money management firms, covering 48 asset classes and 516 different strategies. It studied total costs for a £50 million investment across these asset classes, used by the consultant’s clients. The report is available on LCP’s website.
Jack Lejk contributed to this story.
