Investment manager fees: Is competition working?
October 15, 2019
Investment management fees for certain asset classes have declined substantially, especially in sectors where managers have been under pressure from new competitors, cheaper alternative strategies or heightened visibility on total costs.
The findings are contained in a new study conducted by bfinance, analyzing changes in management fees since 2016.
Using proprietary data culled from actual negotiated fees (as opposed to “rack-rates”) quoted by more than 1100 global asset managers for investors’ mandates on bfinance-led searches over the last three years, the research reported declines of 10 per cent or more in some cases. Particularly significant declines are evident in absolute-return fixed income, emerging market debt and fund of hedge funds.
Specifically, the research found that average management fees for funds-of-hedge funds fell by 28 percent over the past three years. And, over the 12 months to June 2019, the median fund-of-hedge-fund management fee has dropped to 58 basis points. As well, absolute-return fixed-income management fees are down 15 percent since 2016, while emerging market debt fees declined 10 percent. In addition, emerging market equity fees were down six per cent, global active equity fees declined four per cent and European open-ended real estate fees fell by 12 per cent.
Despite these drops, fees alone should clearly not be the sole focus for asset owners as they hunt for the best managers. Asset owners must look at the full picture to ensure that they are getting a good deal overall and aren’t overlooking non-management-fee expenses and, even more obscure, hidden costs that do not show up as an expense to the investor such as the way tax leakage is handled or property-related charges in real estate for example.
Granularity in examining the total cost picture is key. This is particularly important in increasingly popular private market strategies. The research paper highlights, for instance, declining hurdle rates in private equity which, despite slight reductions in management fees, may lead to investors paying more overall.
And of course, finding managers who have a best-in-class investment process and well-developed internal infrastructure to consistently deliver the desired risk-return characteristics over times will always be paramount.
Readers can find the full study here: https://www.bfinance.com/insights/investment-management-fees/