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Fee Pressure Is Real — At Least With These Investors

An analysis of price tags after negotiations reveals a wide range of fee outcomes for equities investors.

Fees on equity investments aren’t simply on a slow downward march. In fact, an in-depth analysis of multi-year data by Investment Metrics for Institutional Investor shows some counterintuitive trends in what investors pay to have their stocks professionally managed.

Between March 2018 and March 2021, the smallest pensions, endowments, and other institutional investors saw the largest rise in post-negotiated fees, according to the analysis. These institutions, which had assets between $100 million to $500 million, experienced a 5 percent increase, according to the analysis. In contrast, the largest investors, those with more than $1 billion in assets, saw a more modest increase of 2.5 percent. But institutional investors that had between $500 million and $1 billion experienced almost no fee changes. 

Damian Handzy, head of research and applied analytics at Investment Metrics, said he expected the largest funds to have experienced less of a bump up in fees than their smaller peers because of the power that comes with a massive amount of assets. But he said it was surprising that plans in middle had no fee increase. 

He added that the range of fees that investors are paying has expanded as well — more evidence that managers are increasingly willing to deviate from their set fee schedules. “There’s a lot of movement going on in the fee space,” Handzy said. “There’s room to negotiate. It surprised me how wide these ranges are. Some managers charge as much as 80 to 90 basis points, and other managers are only able to command 20 or 30 basis points.” 

Investment Metrics found that median fees paid were approximately 0.40 percent in 2018 and 0.50 percent in 2021.

The data analytics firm also analyzed the data by the type of institution: corporate pension plan, public plan, endowments, and others. The median fee paid by corporate pension plans for equities went down by 4 percent over the three-year period. In contrast, public plans’ median fees went up. Endowments and foundations experienced the biggest fall in fees, with costs declining 5.7 percent. 

However, Handzy stressed that corporates still had the lowest median fees. 

As for the asset managers, median fees for small managers — those under $5 billion in assets — are down almost 10 percent, whereas $100-billion-plus mega managers’ median fees have come down only about 5 percent. Investment Metrics’ study of the managers included 229 firms and 9,000 fee observations. 

“The drop in fees is affecting the smaller managers about twice as much as the largest,” Handzy said. But he said small managers still command a premium in fees over the largest ones: Fees at smaller managers are about 13 percent higher.

“Small managers are letting their investors know that as a small or boutique manager, they have certain fixed costs and their fees are going to be higher than the mega ones that have economies of scale,” he said. 

Fees also may reflect the current market cycle. Take value and growth. Value has been struggling for years, up until recently. Handzy said both styles generally have similar price tags. But between July 2019 and June 2021, median fees for value were 0.10 percent less than growth. 

Still, Handzy said he was surprised that even though large-cap equities are one of the most efficient asset classes, managers are charging some high fees. After negotiation with investors, many managers are charging 80 or 90 basis points for U.S. large-cap equity investments, according to the Investment Metrics data.

“There’s a few pushing 100 basis points,” he said. “That surprised me.” 

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