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Master KVG providers 'underestimating cost awareness', says Telos

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Costs for a Master KVG take second place on the investors’ list of important selection criteria for providers, according to a survey by rating agency Telos.

Three-quarters (76%) of the surveyed German institutional investors said they were primarily looking at costs when looking for a provider. Master KVGs allow investors to outsource administration of their portfolios as well as some asset management.

Only track record and references were named as important selection factors by more investors (84%).

The researchers pointed out in their talks with asset managers offering Master KVG services they found that these providers are “underestimating the cost factor”.

Only 17% of providers said in the survey that costs were a “critical point” in their offerings.

Especially among pension funds and insurers “every basis point counts”, Telos said, as many of them have guarantees to fulfil at the lowest risk possible in a low interest rate environment.

“Some investors would be ok with a more basic service level, especially if they do not need the extra services offered,” the rating agency added. This was particularly true for low-risk investors, Telos argued, for whom many specialised service offerings regarding alternative investments did not make much sense.

However, standard fees that are then topped up for extra services “does not help transparency” in the Master KVG market, Telos added.

In 2016 the average fee for a Master KVG mandate stood at 4.25bps, roughly the same level as in 2015 but higher than in 2014 (3.9bps). Fees ranged from 3bps to 6bps.

Overall, however, costs for Master KVG services have come down considerably over the past decade: 10 years ago a complex mandate would have cost almost 10bps, while today it can be accessed for half that fee.

Nevertheless, the share of investors thinking Master KVG services are too costly has increased from 42% to 52% year-on-year in the Telos survey.

The analysts warned that the pressure on costs has also generated at race to the bottom with some providers pushing prices “only in order to generate more assets under administration”.

“It is not for us to judge whether this competition is ‘healthy’”, the researchers noted.

They added that “some providers, including larger ones, are not taking part in this fee battle anymore”.

Last year, 60% of investors said they would switch providers over the cost question, Telos said.

Compared to the 2015 survey, the selection criteria cited by investors were more diversified but the top priorities remained the same.

Spezialfonds – institutional investment funds administered by Master KVGs – recorded their second best year for sales in 2016, according to figures released by the German fund management trade body (BVI) today. Fund management companies collected inflows of €96.3bn, compared with €120.7bn in the “exceptional” year of 2015, it said.

For the first time, pension investors rather than insurance companies provided the most new business for Spezialfonds.

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