The end of fees as we know them
Taking to the stage on the first day of the National Association of Pension Funds Investment Conference in early March, Paul Marsh of the London Business School unwittingly set the tone for the rest of the event.
Outlining to attendees why we are currently seeing the end of returns as we know them, he attacked the way US pension plans still expected 10% real returns on equity as “plain crazy”. He also said that if, in future, investors could no longer count on double-digit gains each year, then trustees would be forced to make each investment count.
Highlighting asset managers that still talked up targets as high as 10% real return, he said:
“I think if you are an asset manager making those kinds of boasts, you should probably quietly start changing that.”
Marsh said further that as returns fell and began eating up “a significant part of the gross return”, fees would come under closer scrutiny. “And, just maybe, those of you who are asset managers here, you are going to find some pressure on management fees.”
The discussion over fees, and how high costs are holding back investment, continued over the next two days. Whereas Ciarán Barr, head of strategy at RPMI, noted that active management and the associated fees were necessary while investing in emerging markets, Tesco Pension Investment CIO Steven Daniels, responsible for the UK supermarket’s £7bn (€8.1bn) fund, countered that exposure to the region’s economic growth could be gained through other means than buying into an emerging market fund.
Daniels also said investments were increasingly being repackaged in different guises, partially aided by the many ways assets such as infrastructure could be accessed – either through debt or equity.
“We are seeing private equity funds being launched for everything – and very often when you look at private equity management activity, or what people claim is private equity, it isn’t,” he said. “If I were a cynic, I would say it’s just a way to charge us higher fees.”
Another debate focused on the opportunity for pension funds to access the private credit market, a notion Daniels earlier endorsed by stating funds should be happy to be the “new banks”.
Michelle McGregor-Smith and James Dumberly of the British Airways and BBC pension schemes, respectively, said they had considered the asset class, but McGregor-Smith, chief executive of the airline’s in-house manager, said there was uncertainty over how to source the loans and some “very large fees to the managers”.
Dumberly added that entering the loan market was a “brilliant” idea. “Really, it should be the biggest advantage of pension schemes that they have a long-term time horizon and can take advantage of illiquidity. We’ve been looking quite hard. We’ve been looking for good yields, low default risk, limited leverage, simple fund structure and low fees. So we’ve done nothing, of course, over the last year,” he joked.
Clare Scott of host city Edinburgh’s £4bn Lothian Pension Fund framed the fee argument around the topic of governance and a fund’s ability to invest wisely in alternatives, such as the social housing. “We are very much one for not skimping on internal resource and expertise [rather than paying] a fortune to a fund manager,” she said. “So spending a little on internal resource to scrutinise opportunities is certainly worthwhile.”
Her views were shared by Keith Ambachtsheer of the Rotman International Centre for Pension Management, who argued the following day that a good in-house asset manager would avoid the need to outsource at the significantly higher cost of 2 and 20 fees.