Sustained investor pressure on fund managers to slash their fees is working — at least in some pockets where management fees are concerned.
That’s the conclusion of a new study expected to be released Monday by bfinance, a specialist investment consulting firm. The firm analyzed changes in management fees since 2016, using data based on fees being quoted by asset managers for existing mandates, and reported that some strategies and fund structures have seen double-digit declines in the management fees they charge clients.
“There’s been a lot of pressure on fees, but this is not a market in which price comparison functions terribly efficiently,” said Kathryn Saklatvala, head of investment content for bfinance, in a phone interview. “Both fees paid and total costs paid are quite nontransparent, and the quality can be challenging to assess, so there are various things that inhibit competition. But it’s good to see some quite concrete declines in fees and managers.”
Management fees for funds-of-hedge funds, an industry that has been in decline since the global financial crisis, plummeted by 28 percent over the past three years, bfinance found. Over the 12 months to June, the median fund-of-hedge-fund management fee has fallen to 58 basis points, or 0.58 percent.
There are other examples: Absolute return fixed-income management fees are down 15 percent over the period, while emerging market debt fees slid 10 percent. Emerging market equity fees declined a bit less — six percent — and global active equity fees fell four percent.
Still, the consultancy cautioned, asset owners need to look at the full picture to ensure that they are getting a good deal overall and aren’t overlooking hidden costs. That’s especially true in red-hot private market strategies.
“In all strategies it’s important to look at overall costs and fee structures; in private markets it’s even more important,” said Saklatvala. “There is complexity everywhere, but in private markets becomes particularly problematic.”
Take private equity funds. The study found that some private equity managers have cut management fees, typically from 2 percent to 1.75 percent. But over the same period, some of those managers have lowered their so-called hurdle rate — the return target they must meet before they can start charging performance fees — meaning they can charge those lucrative fees earlier. That means cost savings from lower management fees are sometimes canceled out.
While private market fees are harder to assess, according to bfinance, investors have achieved some success negotiating lower management fees in U.S. direct lending funds as well as European open-ended real estate products.
Falling fees come down to a number of factors, according to bfinance, including competition and rising transparency around costs. Investors have employed a few techniques successfully to achieve these cost savings over the past few years, according to bfinance.
One is mandate consolidation, or simply choosing fewer managers but assigning them larger pools of capital. Fund managers often offer lower fees for larger ticket sizes, although these discounts can vary widely from asset class to asset class.
“Don’t assume before knowing the data that if you consolidate, you’ll for sure get more savings,” cautioned Saklatvala.
Another tool investors have successfully employed is deconstructing returns and applying those findings in fee negotiations. This entails putting scrutiny on where returns are coming from, what factors they are exposed to, how much risk they’re taking, and so on. Saklatvala notes that this tool is often used as part of the manager selection process, but investors are beginning to use the findings when negotiating costs.
Investors have also gotten deals by using alternative fee structures, called performance-related fees, though these need to be designed carefully, according to bfinance.
“Executed poorly, [performance-related fees] can create problems such as paying high fees for negative returns during downturns or excessive risk taking,” the report stated.
Ultimately, asset owners need to make sure they aren’t prioritizing rock-bottom fees at the expense of quality, the firm concluded.
“You can cut your nose off to spite your face,” said Saklatvala. “Be very granular, look at the overall costs picture, the hidden costs, and be quite sensitive” to those issues, she added.
On the flip side, investors shouldn’t assume that more expensive funds must necessarily be high quality.
“We have not found correlation in those asset classes between fees and quality in terms of what subsequent performance was,” Saklatvala added. “The good thing is, for those digging in, there is great value to be had. But fees and quality do not go hand in hand.”