During negotiations on the fee that asset managers charge institutional investors for the management of a mandate, providers give an average discount of 5 to 15%. However there is no transparency about the average price that providers actually charge for mandate management, explained Duncan Higgs and Kathryn Saklatvala, following the publication of their research into fund house fees last week.
bfinance is an independent, privately-owned investment consulting firm that provides advice and solutions to pension funds and other institutional investors.
In the publication, the consultancy concludes, among other things, that the costs of active ESG (environmental, social, and governance) mandates, multi-sector fixed income mandates and fund of hedge funds have fallen significantly.
The study, which the consultant carries out every two years, did not use so-called “rack rates”, i.e. the official rates charged by asset managers. Instead, it is about actual prices for real mandates, which providers propose after specific customer queries submitted by bfinance, which has these types of institutional investors as customers.
“It is absolutely normal for a manager to propose a lower fee to a potential client than the fee they would quote during an industry survey and then offer another discount during the negotiation process,” said Saklatvala, bfinance’s head of investment content. “The average discount is between 5 and 15 per cent, depending on the asset class.”
Difficulty: fair fees
Asked about the current transparency around asset managers’ fees, she and head of portfolio solutions Higgs said it remains difficult for investors to work out what a fair fee is for a strategy. “You have to understand the nuances and specific investment structures to figure out what a good price is. The negotiated level of fees that clients achieve, you don’t get from asset managers. So there is no transparency about the average fee that clients actually pay. Asset managers don’t make that public, and clients don’t either - because it’s confidential information.”
Negotiating a discount for established strategies is commonplace, according to Higgs and Saklatvala, but managers who want to grow their new strategies will sometimes give a pre-determined, “official” discount. This is currently the case with impact and Article 9 equity strategies. The aim, according to bfinance, is to achieve an inflow boost and thus gain market share.
“Even before we start negotiating, I can tell you that our official fee is 70 basis points, but 58 basis points if you get in now,” Saklatvala mimicked such an offer from a provider to an institutional party. “This strategic discount is often around 10 to 30 per cent, after which an additional discount can be negotiated.”
Reducing costs
All in all, this should lead to a significant reduction in the fees charged. Indeed, according to the study, institutional asset management fees have fallen significantly in a number of asset classes, mainly those of certain ESG strategies or impact strategies, according to the study’s main conclusion.
In the case of an ESG-labelled equity fund, fees have fallen by an average of 14 per cent over five years for a mandate of EUR 100 million. The costs for US high yield funds have fallen by an average of 15 per cent since 2017, those for mixed EMD (emerging market debt) funds by an average of 10 per cent over the same period. Hedge funds even saw a 42 per cent drop between 2010 and 2019, although this has also come to a halt since then.
Private markets
Private markets are an exception to the trend. The fees for this type of strategy have remained fairly stable, according to the study. “Providers of these strategies are more individualistic in this respect,” Saklatvala explained, although this market, too, is “really changing”.
“For example, almost all parties now calculate the fee for direct lending on the invested capital alone, instead of on the committed capital, which used to be the case,” she said. “So if you look at the total costs, you see that there is movement there as well.”
According to Higgs and Saklatvala, the difficulty with this category is that the structure of the fees is different, because the hurdle rate (the predetermined return percentage from which the performance fee starts) also plays a role, as do other aspects of the structure.
“To understand what the total cost is, you also have to make a yield assumption, to be able to ultimately calculate which manager is cheaper or more expensive. One manager may appear more expensive than his colleague on the basis of an assumed return of 7 per cent, but the second manager may be cheaper if he achieves 9 per cent.”
“It’s also about value for money”, said Higgs” “What, for example, is the liquidity of a strategy, return after fees and the ability to redeem? In other words: what does a manager do for the money you put in? That is actually always the question that an investor has to ask himself during a negotiation process.”