bfinance global fee research shows fees continue to fall but investors’ overall costs rise
Funds management fees have fallen globally across several asset classes amid rising competition from new, cheaper products and greater scrutiny by investors looking to cut costs, new research by investment consultancy bfinance has found.
The bfinance report “Investment Management Fees: New Savings, New Challenges” found that active global equity management fees have dropped by 8% since the 2010-2014 period as many big investors have embraced passive strategies, brought functions in-house or pulled vendors to the negotiating table. Low volatility active managers are among the hardest hit, with fees down 24% since 2010.
The findings come as large institutions in Australia and internationally continue to hit the headlines over asset management fees, announcing cost cutting measures to shore up returns in a low rate environment and expressing disappointment in the performance of active managers in the wake of the global financial crisis. Last month, it was the turn of the North Carolina Treasury, described by Bloomberg as “the US$90 billion investor out to fire Wall Street,” while in Australia, Future Fund Chief Investment Officer Raphael Arndt outlined a “new approach” aimed at ensuring managers are only paid for “true stock-picking skill” rather than beta or factor-style bets.
bfinance director, Australia, Frithjof van Zyp said: “Active managers in Australia and globally are under tougher scrutiny than ever and investors are increasingly reluctant to pay inflated fees for betas dressed up as alpha. What our research has shown is that fees are responding to a new dominant mindset among investors, which is that while returns are hard to predict, small cost reductions deliver guaranteed gains over the long term.”
Other sectors to suffer large falls were smart beta funds, down 25% since 2011, and fund of hedge funds, who have cut fees by 20% since the 2010-2014 period as they’ve sought to recover ground lost after the rout of their assets during the global financial crisis, according to the report, which examines the fees of more than 160 managers worldwide.
Despite ongoing fee pressure, the report notes overall costs have actually increased for sophisticated investors due to greater allocations to private markets and new breeds of premium product, citing data from CEM Benchmarking indicating pension fund costs have grown from 37.8 basis points to 57.3 basis points over the past ten years.
bfinance offers three takeaways: renegotiate, reassess and reprioritise.
“Where significant price reductions have taken place, such as low volatility and smart beta, now may be the time to bring providers back to the negotiating table. If fees proved to be a crucial factor in investment strategy, such as the choice of single hedge funds versus FoHFs, it may be worth examining the question again. Finally comes the question of priorities: stakeholders should always
remember that, while asset allocation is always preeminent, implementation risk is increasingly critical to investor outcomes for today’s more illiquid and expensive portfolios,” Mr van Zyp said.
Key findings by sector
Active global equity fees have fallen by 8% since 2010-2014 amid intense pressure from passive and smart beta products
bfinance says while this fall is meaningful, the sector has held up surprisingly well overall considering the pressure from low-cost index trackers. Still, fees in the niche of low volatility active management have fallen by a much bigger 24% since 2010.
“Active management fees have been surprisingly resilient in the face of intense competition from smart beta and passive funds,” said Mr. Vanzyp. “Yet there’s been a clear division in the sector, as products with strong factor exposures, bear the brunt of cost reductions.”
The report suggests a number of causes for the resilience in the sector overall, such as the transparency relative to other sectors (causing a tendency to cluster around known average fees) and the trend to position active offerings as complementary to systematic strategies rather than competitive.
Fund of hedge funds cut fees dramatically
Fund of hedge funds (FoHF) have sought to regain lost ground since the post global financial crisis rout and this report reveals that average management fees have fallen by 20% globally and nearly 30% in Europe since the 2010-2014 period. The challenge to attract asset inflows into FoFHs has been made more complicated by the evolution of alternative beta and the growing popularity of various multi asset or diversified growth strategies.
Private markets present a difficult picture, with managers often holding the upper hand
Private market manager fees have remained high, particularly in infrastructure and private equity, and have even risen in some cases, with too much money chasing the available supply of opportunity.
“Why have certain very popular private equity managers done away with hurdle rates? The answer is very simple: because they could,” says Anne Feuillen, a Senior Director in bfinance’s Private Markets division in the report.
“But this has a meaningful negative impact on net returns and reduces the alignment of interests between GP and LP. It is very hard for investors in this fundraising climate to say: ‘No, that is a step too far.’”
However, there are certain areas within private markets where fees have come down a great deal. The report highlights private debt strategies where base fees have fallen by more than 30% since 2014. Private equity fund of funds, particularly those focused on primaries, have also become significantly less expensive. Investors in these sectors should ensure they capture these savings.
David Vafai, CEO at bfinance, concluded: ““It is important to remember that fees and costs, although they are the focus of this study, are never the most important metrics. Although we point to sectors where significant fee reductions have taken place, and encourage investors to take
advantage of them, we certainly do not seek to advocate cost reduction for its own sake. Value for money is the most important priority and we appreciate that more robust and diversified portfolios may deliver higher net performance despite greater expense.