The past decade has seen a downtrend in investment management fees for institutional investors across most core asset classes, however private market assets have seen a fee rate rise, according to consultancy LCP.
The consultancy’s latest research study – LCP Investment Management Fees Survey – shows that on average, fee rates are 0.2% lower for a global active equity mandate and 0.4% lower for a multi-asset mandate, compared to its last survey in 2019 (LCP has been surveying institutional investment managers bi-annually since 2010).
It also revealed that private market asset class fee rates have risen markedly, most likely due to the increased popularity of these asset classes among institutional investors in recent years.
In the UK, a significant cohort of institutional investors are defined benefit pension schemes. As many of these have matured, scheme trustees have been de-risking their asset portfolios by moving away from equities, LCP said in its survey report.
Asset classes such as private direct lending, long lease property and infrastructure are seen as lower risk sources of return and income generation, and have seen increases in allocations. This increased demand may explain the higher average fee rates for these asset classes compared with 2019, it added.
“Fees and costs can make a big difference to the investment return you achieve, especially if you’re investing over many years,” said Matt Gibson, partner and head of investment research at LCP.
“Of course, it is the net return that matters to investors. If a high-performing manager has achieved excess returns that more than offset their fee, investors may be satisfied. The problem is no investor knows in advance if they’re investing with a manager that can achieve any excess return, let alone one large enough to offset fees and costs,” he added.
Gibson noted that when determining if an investment manager is providing value for money, the total costs need to be considered.
Managers can increase costs by trading the portfolio of assets they manage on behalf of the asset owner as they attempt to improve returns, he said.
LCP, however, encourage investors to monitor their managers’ fee rates regularly.
“All costs need to be considered relative to the benefits received in incurring them. We believe that getting value for money is more important than simply reducing costs,” it said.