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Unconstrained fixed income sector a 'pricing shambles': research

Pricing in the increasingly popular unconstrained fixed income sector is a “shambles”, according to consultancy bfinance.

It said there was “premium pricing confusion”, with fees highly dispersed around a 48bps median and little correlation between prices and the nature of the strategies, such as the amount of risk or the proportion of different types of fixed income.

“The sector is remarkably diverse and poorly segmented,” said bfinance.

It noted there had been a surge in mandates for “unconstrained” or “absolute return” fixed income in recent years, provoking a wave of product launches.

However, with an average quote of 48bps, these “benchmark-agnostic” strategies were considerably more expensive compared with conventional global aggregate funds, according to the consultancy.

This was before negotiation, although there was no standard expectation for discounts, bfinance added.   

The consultancy made the comments in a new report on investment management fees, which argued that overall investment costs are higher for large pension funds despite fees falling across several asset classes.

It said that growing interest in illiquid markets and asset managers pushing newer, more expensive public market products were driving costs higher.

“Unexpected” pricing resilience in certain asset classes also contributed to the overall rise in costs, according to bfinance.

The consultancy said the average large pension fund was paying out a higher proportion of their assets under management in investment costs than they were 10 years ago.

It cited data from CEM Benchmarking, which showed that total fund costs of the institutions in the provider’s database rose from 37.8bp to 57.3bp over the past 10 years.

bfinance contrasted this with falling fee levels across several asset classes.

The consultancy found that active global equity fees were down by a “meaningful” amount since 2010-2014 (8%), but were “surprisingly resilient”.

Fees fell much further in other sectors such as smart beta (25% since 2011) and low volatility strategies (24% since 2010), according to bfinance.

Funds of hedge funds cut fees “dramatically”, the consultancy said, pointing to a 20% reduction globally in average management fees since the 2010-2014 period, and a reduction of nearly 30% among Europe-based funds.

Manager fees in the private markets have remained high, bfinance said, especially in infrastructure and private equity. In some cases fees have increased, the consultancy said, with some hurdle rates lowered or dropped. 

European private equity fundraising reached an eight-year high last year, according to data released by the trade association Invest Europe today. It said pension funds accounted for a third of the €74.5bn raised. 

Fees have fallen in other private markets, however, according to bfinance. It said base fees for private debt strategies have come down by more than 30% since 2014, and private equity funds of funds, especially those focused on primaries, have also become significantly less expensive.

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