In this blog, Matt Gibson highlights five of the most interesting points revealed in LCP’s 2017 investment management fee survey.
Every 2 years we ask more than 100 investment managers to tell us about the fees they are charging for managing pension funds’ money. We look at these fees across 48 different asset classes and 516 different products. This deep-dive into the data gives us some really interesting insights so I wanted to share the 5 most interesting things I learnt from our 2017 investment fee survey:
1. Investors are rewarding mediocrity
The typical benchmark for investment managers is to deliver returns above a market index or peer-group return. So, it would make sense that the fees paid might go up if the returns are well above this benchmark… the manager is working hard for it, right?
Well we learnt that managers who failed to hit this benchmark return, were still benefiting from materially increased fee levels because of the general rise in market values. For example, for a £50m mandate, the average global equity manager increased their annual fee by around £262k (a 70% increase) regardless of performance and a UK corporate bond manager pocketed an additional £40k (a 27% increase) even if they didn’t add value.
I can’t help but ask the question “Why are investors rewarding mediocrity?”
2. Costs have a huge impact on outcomes
Over the long term, costs have a huge impact on outcomes. For £50m invested over the past 20 years in UK equities, an active manager who matched the index return, would have received £9.9m more in fees than a passive manager. But because those fees are removed from the pot and aren’t there to earn a return on, the investor in that active manager ends up with £18m less than an investor in a passive fund.
It’s therefore really important that investors make sure they are getting value for money from their active asset managers. If not, the investor, whether this is the sponsor of a defined benefit scheme or member of a defined contribution scheme, will need to make up the shortfall some other way.
3. Not everyone wants to tell us their transaction costs
We had a better response rate on transactions costs this year than from previous surveys. However, getting consistent information on transaction costs, so that we can compare apples to apples, continues to be a problem. The variation in reported transaction costs (in some cases varying from £20k to £400k for the same £50m mandate), can’t be explained by different levels of portfolio turnover alone. The differences are down to varying approaches and different items included in the transaction costs figures. In the survey we include a list of all the transactions costs pension funds typically face.
4. The FCA has got (pretty much) the right idea
The FCA’s asset management market study has highlighted some concerns with value-for-money from the asset management industry. They found that 60% of the total charges for an institutional fund are, on average, the asset manager’s fee. So they are on the case with initiatives designed to assist investors to get better value for money. I’m looking forward to seeing their final proposals to drive competiveness in the asset management industry.
5. If you don’t ask, you don’t get
By understanding the fees and benchmarking across managers, pension fund trustees and sponsors can really get to grips with whether they are paying the right amount to their investment manager. Using independent consultants is an excellent way to make sure you are getting good value for money. With one of our clients, by asking the right questions, we helped them reduce their fees by 20%. So why wouldn’t you ask?