Management fees are falling for these asset classes
Sustained investor pressure on fund managers to cut fees is working, at least in some pockets when it comes to management fees.
This is the conclusion of a new study which should be published Monday by bfinance, a consulting firm specializing in investment. The company has analyzed management fee trends since 2016, using data based on fees quoted by asset managers for existing mandates, and reported that some fund strategies and structures have seen declines. double-digit management fees they charge to clients.
âThere has been a lot of pressure on fees, but it’s not a market in which price comparison works extremely effectively,â said Kathryn Saklatvala, head of investment content for bfinance, during a telephone interview. âThe fees paid and the total costs paid are not transparent, and quality can be difficult to assess, so there are various elements that hinder competition. But it’s good to see some pretty concrete reductions in fees and managers. “
Management fees for funds of hedge funds, an industry in decline since the global financial crisis, have fallen 28% over the past three years, bfinance found. In the 12 months ending in June, median management fees for funds of hedge funds fell to 58 basis points, or 0.58%.
There are other examples: management fees for absolute return fixed income securities fell 15% over the period, while emerging market debt management fees fell 10%. Emerging market equity commissions fell slightly less – six percent – and active global equity commissions fell four percent.
Still, the advisory firm warned, asset owners need to look at the big picture to make sure they’re getting a good deal overall and not overlooking hidden costs. This is especially true in hot private market strategies.
âIn all strategies, it’s important to look at overall costs and fee structures; in private markets, it is even more important, âsaid Saklatvala. âThere is complexity everywhere, but in private markets it becomes particularly problematic. “
Take private equity funds. The study found that some private equity managers reduced management fees, typically from 2% to 1.75%. But during the same period, some of these managers lowered their so-called minimum rate of return – the return target they must meet before they can start charging a performance fee – meaning they can charge these lucrative fees sooner. This means that the cost savings resulting from lower management fees are sometimes canceled out.
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While private market fees are more difficult to assess, according to bfinance, investors have had some success negotiating lower management fees in US direct lending funds as well as open European real estate products.
According to bfinance, the decline in fees is due to a number of factors, including competition and increasing cost transparency. Investors have successfully used a few techniques to achieve these savings over the past few years, according to bfinance.
One is the consolidation of mandates, or simply the choice of a reduced number of managers but their allocation of larger reserves of capital. Fund managers often offer lower fees for larger notes, although these discounts can vary widely between asset classes.
âDon’t assume until you know the data that if you consolidate you are sure to save more,â Saklatvala warned.
Another tool that investors have used successfully is to deconstruct returns and apply those results in fee trading. This involves looking at where the returns are coming from, the factors they are exposed to, the level of risk they take, etc. Saklatvala notes that this tool is often used as part of the manager selection process, but investors are starting to use the results when negotiating costs.
Investors have also entered into deals using alternative fee structures, known as performance-linked fees, although these need to be designed with care, according to bfinance.
“Badly executed, [performance-related fees] can create problems such as paying high fees for negative returns in a downturn or taking excessive risk, âthe report says.
Ultimately, asset owners need to make sure they don’t prioritize the lowest fees over quality, the company concluded.
âYou can cut your nose to annoy your face,â Saklatvala said. âBe very specific, look at all the costs, the hidden costs and be quite sensitive” to these issues, she added.
On the other hand, investors shouldn’t assume that more expensive funds necessarily have to be of high quality.
âWe did not find any correlation in these asset classes between cost and quality in terms of subsequent performance,â added Saklatvala. âThe good thing is, for those who dig, there is great value to be had. But cost and quality don’t go hand in hand.