6 Jun 2011
bfinance, an independent, privately-owned, financial services firm that provides advice to companies and institutional investors around the globe, has announced the results from its third major global fee study based on its tenders run during the last twelve months. The study encompasses 50 mandates relating to typical investments in international institutional portfolios with findings based on almost 1,200 price quotes from 350 fund management companies.
The survey showed that management fees throughout the world remained stable last year, albeit firming by a few basis points in individual cases among the more sought after asset classes, such as emerging market debt and emerging market equities. For actively managed equity mandates of all sizes, the highest fees continue to be charged for Latin American equities. Conversely, for externally managed funds, some of the lowest management fees were for investment grade Eurozone credit mandates, with a median of 0.23% and a mean, 0.24%.
The striking finding from the survey, however, was the scale of reduction in initial fee quotes to ones actually charged. The fund managers which had been shortlisted by bfinance after quantitative and qualitative analysis made significant improvements to fee structures in open competition with other managers up to the final decision.
Analysis of two case studies showing how an institutional investor can optimise their financial costs highlights the benefits of making fund managers compete in an independent process. With a reference portfolio of £1 billion and an asset allocation that is representative of UK institutional investors, the cost of fund management can be reduced by around 5% if the investor chooses to optimise its costs by limiting the number of mandates. The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation. Based on fee negotiations noted on a range of asset classes in the searches carried out by bfinance, the reduction in costs exceeded 26% across the entire outsourced investment management portfolio.
When comparing fixed management costs and structures with performance-related fees offered by fund managers, the survey found that managers appear to use highly conservative assumptions about the alpha they believe they can generate. For active European/Eurozone equity fund management, payment based on performance-related fees becomes much more advantageous for the half of fund managers who offer it once the alpha generated exceeds 1%. Surprisingly, no fund management company has a fee structure requiring it to beat a benchmark of at least 2%.
The survey showed that management fees throughout the world remained stable last year, albeit firming by a few basis points in individual cases among the more sought after asset classes, such as emerging market debt and emerging market equities. For actively managed equity mandates of all sizes, the highest fees continue to be charged for Latin American equities. Conversely, for externally managed funds, some of the lowest management fees were for investment grade Eurozone credit mandates, with a median of 0.23% and a mean, 0.24%.
The striking finding from the survey, however, was the scale of reduction in initial fee quotes to ones actually charged. The fund managers which had been shortlisted by bfinance after quantitative and qualitative analysis made significant improvements to fee structures in open competition with other managers up to the final decision.
Analysis of two case studies showing how an institutional investor can optimise their financial costs highlights the benefits of making fund managers compete in an independent process. With a reference portfolio of £1 billion and an asset allocation that is representative of UK institutional investors, the cost of fund management can be reduced by around 5% if the investor chooses to optimise its costs by limiting the number of mandates. The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation. Based on fee negotiations noted on a range of asset classes in the searches carried out by bfinance, the reduction in costs exceeded 26% across the entire outsourced investment management portfolio.
When comparing fixed management costs and structures with performance-related fees offered by fund managers, the survey found that managers appear to use highly conservative assumptions about the alpha they believe they can generate. For active European/Eurozone equity fund management, payment based on performance-related fees becomes much more advantageous for the half of fund managers who offer it once the alpha generated exceeds 1%. Surprisingly, no fund management company has a fee structure requiring it to beat a benchmark of at least 2%.
Emmanuel Léchère, Head of Market Intelligence Group at bfinance, said: “A key prerequisite for managing down fund management costs is an open, transparent negotiation process when selecting external fund managers. This comes across very clearly from this survey and forms a key part of our manager selection process at bfinance".
Commenting on performance related fees, Olivier Cassin, Managing Director, Head of Research and Development at bfinance said: “Performance related fee structures are by their nature interesting, as they align the interests of investors and managers, but investors, with the help of their consultants, must systematically seek to rebalance the structure offered by the fund manager in their favour.”
