Investment Management Fees Take a Hit

Fee levels are increasingly under downward pressure, according to a survey by bfinance of major European and global fund managers.

(June 24, 2012) — The future of investment management fee–especially for hedge funds and some active managers–does not look bright, according to bfinance.

A survey conducted by the consulting firm of major European and global fund managers — representing around £6 billion (US$9 billion) in assets under management — reveals that traditional US, Japan, and UK equity funds have lower fees. These funds, according to bfinance, are net losers of assets, as pensions have reduced their weightings to active management, pursuing passive investing strategies in order to reduce costs.

Fee levels continue to be determined by a range of factors, the study noted, including:

1. mandate size, asset class, complexity of the mandate, 

2. structure of the investment (pooled/segregated)

3. amount of work required for client servicing, 

4. demand, 

5. capacity constraints, 

6. resources, 

7. views regarding future market positioning, 

8. peer relative price positioning, 

9. if the product was recently launched, 

10. existing/wider relationships with the client.

According to the survey, a majority of respondents said that investors were getting smarter about only paying for genuine alpha and would not pay for beta, whereas there was an acceptance across the industry that investors were prepared to pay for outperformance. Meanwhile, around half of those surveyed said they were under pressure to be more flexible on fees and that there had been a move by clients toward performance-related fees, high water marks, and lower base fees.

With regards to trends over the last 18 months, around half of respondents reported an increasing prevalence of clients challenging underperforming fund managers about their fees, particularly where they had underperformed the relevant market index.

The survey findings are based on emailed responses and telephone interviews conducted in late May/early June 2012, with 16 UK, French, Dutch and US fund managers.

bfinance’s study follows research it conducted in June of last year that showed that hard bargaining has given institutional investors the power to negotiate double-digit percentage discounts on fund management fees. The firm said savings of more than 26% were possible among institutional investors hiring managers, on average, based on the rates that managers were first quoted. According to the research, a typical institutional investor in the United Kingdom allocating £1 billion could also cut fees by about 5% by limiting the number of mandates it has.

The study reflected heightened pressure on managers since the financial crisis to pay closer attention to their fees in terms of level and structure. As investors suffered huge losses during the financial crisis, management and performance fees and alignment of interest between investors and fund managers have become a greater concern.

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