There have been substantial reductions in external manager fees for asset classes including global equities, emerging market equities and hedge funds, according to new research from bfinance.

Fee compression has been driven by factors including the rise of cheaper competitors, increasing transparency on costs, and expansion of the manager universe, said the research paper.

Figures were based on real fees being quoted by asset managers for real mandates, and not surveys or “rack rates”, which bfinance said tend to be inflated.

According to the consultancy, for active global equity mandates fees have fallen by 7% since 2013 and 4% since 2016.

Median quoted fees for a US$100m (€90m) mandate currently sit at 55 basis points (bps), with reductions particularly notable for the lower quartile, where fees have fallen from 51bps in 2013 to 46bps in 2016 and 42bps in 2019.

Larger fee reductions are seen in global emerging market equities, with fees down 13% since 2013 and 6% since 2016. The median quoted fee for a US$100m mandate is now around 74bps, with considerable scope for downward negotiation, according to bfinance.

Emerging market debt (EMD) pricing, which bfinance said proved exceptionally resilient until 2016, has since fallen, with a 10% drop in median quoted fees. The position of investors was strengthened by last year’s outflows.

For private markets, the paper said that unpacking pricing movements was challenging, because of the complexity of fee structures. But it highlighted evidence of declining fees in certain asset classes such as European core open-ended real estate (fees down 12%) and US direct lending strategies targeted at non-US clients (median management fees down by over 20%).

It said that overall, fund managers in private markets had been under less pricing pressure than their public market counterparts, due to a strong fundraising climate.

Across the asset classes analysed, funds of hedge funds fees registered the biggest fall over the past year, dropping by 28% over the period from 80 to 58bps.

A key driver of continuing fee reduction for this asset class, according to bfinance, is the emergence of less expensive models for delivering similar strategies, such as funds of sub-advisors.

The report also pointed out that European fund of hedge funds managers are more likely than their US counterparts to state upfront that fees must not exceed a certain level, while US managers tend to prioritise overall value.

kathryn saklatvala

“While there are some interesting developments taking place, such as the Cost Transparency Initiative in the UK, investors will only benefit if the data is sufficiently granular and specific.”

Kathryn Saklatvala, head of investment content, bfinance

Kathryn Saklatvala, head of investment content, bfinance, said:  “The reductions in average fees across various asset classes are welcome news for investor clients. Yet there are still significant barriers to price competition across the asset management industry.”

She said these barriers included a lack of visibility on actual fees or total costs, or the reality that manager selection methods may not facilitate and maximise competition on pricing.

She concluded: “While there are some interesting developments taking place, such as the Cost Transparency Initiative in the UK, investors will only benefit if the data is sufficiently granular and specific.”

WTW urges EMD implementation rethink

Separately, a report from Willis Towers Watson (WTW) has argued that investors buying simple, benchmark-focused EMD managers often fail to justify the management fees charged, and struggle to access the most interesting corners of the opportunity set.

The asset class is becoming more strategically important both in global markets and in investor portfolios.

But with under half the universe achieving positive returns above benchmark even before fees, most investors have been disappointed by active investing.

WTW said that instead of treating EMD as a single asset class, investors should see stronger overall returns by selecting the best manager in each region and asset class – local currency sovereign debt, hard currency sovereign debt and hard currency corporate debt – and with specific knowledge and skills. 

“EMD is not a single opportunity so it cannot be captured by a single, broad mandate,” said Chris Redmond, global head of manager research at Willis Towers Watson.

“We believe investors need to consider a shift in focus is needed towards specialist implementation, building a portfolio comprised of a ‘master’ in each area of the market.”