On the Record: How do you optimise asset management costs?

During 2015, asset management costs were about 26bps of total AUM, while administration costs were 7bps. Because employers bear the administration costs in full, the actual cost for members is 26bps of their pension pot. This is about half of what is paid by members of the average pension scheme in Italy. Looking ahead, we forecast the figure to grow to about 55bps for the first time, after we renew our mandate. However, our scheme will be still be below average in terms of costs, as costs are rising for the whole industry in Italy. 

We have experienced constant pressure to reduce costs for some time. The founding parties of the scheme, both from the employer and employee side, have always pushed for cost reduction. In response, we have cut marketing expenses to almost zero. Our statute also establishes that the trustees receive no compensation. This has allowed us to minimise the expenses for members in terms of initial membership fee, advance and redemptions. Employers, on the other hand, pay €20 a year per employee.  

At the moment, our scheme is a single guaranteed investment fund. We have opted for an insurance-type asset management mandate, mainly invested in fixed income. For simplicity and coherence with our cost-containment objectives, we opted for a fixed remuneration system. As a result, the costs are lower than the market average. Cost containment is in our DNA and, thanks to our policy, we are faring better than our peers in the air transport sector, both in terms of costs and returns.

I believe asset management firms respond to concerns about costs, but there are further margins for them to contain expenditure. It is also true that, in recent years, European and domestic regulation has increased costs for them, which has had an impact on retirement systems. We are able to negotiate with managers, not necessarily because of the size of our AUM, but also because the staff that work for Fonsea have gained significant experience and ability over time. This allows us to manage the scheme with a high degree of technical sophistication and to conduct successful relationships with all the stakeholders. What matters are the people that run the scheme, not the AUM. We feel that in our world it is possible to identify several cases of ‘small is beautiful’ like ours, where a small pension scheme that is run well can be more efficient than a large one.

Last year we paid between 50bps and 100bps in asset management costs. Our expenditure in asset management costs is falling, independently of the growth of our assets under management. We are willing to pay performance fees for most types of investment products, as we believe they create sufficient alignment of interest between us and the asset managers we employ. Recently, we negotiated a new set of variable fees based on the alpha we achieve versus our benchmark. This was also linked to our recent addition of absolute return to our portfolio of strategies. 

We do not think performance fees necessarily create perverse incentives for managers. As an institution that needs to invest in assets other than ETFs to achieve optimal diversification, we need to be prepared to reward managers properly. That said, we would also welcome the idea of strengthening disincentives for managers to underperform, to align interests better and share responsibilities with managers. Perhaps, performance fees should only be awarded after extended time periods – say, three years or longer, rather than annually. 

Pensions Caixa 30 employs a large number of managers, around 60 at the moment, and has a hedging strategy to protect from downside risk. We have strong views on what constitutes better value for money in investment management, and believe that long-only active management can still offer great value, followed by unconstrained/absolute-return strategies and hedge funds. We feel that alternative assets, such as real estate, infrastructure and private equity also offer attractive value, even considering their higher fees. Compared with other industries, we do not feel that asset management offers less value for money.

We have not experienced significant pressures from regulators or the public to reduce our cost base, which we feel is low to begin with, if compared with our results. Pensions Caixa 30 provides great investment diversification to its members and a strong risk-management framework, which allows the scheme to be particularly efficient. 

The scheme also has a strong policy of responsible investment in place, which is another benefit to our members that requires effort and resources. In that respect, we notice the discussion on standardisation of fee reporting. Transparency is welcome, but we believe it only partially solves the problem.

In 2015 our investment costs were 44bps of AUM, including internal and external investment costs. The figure has been falling slightly in recent years, influenced by two factors – the combined effect of declining costs per unit of invested assets (keeping the asset mix fixed), and an increase in the amount of alternative assets and risky assets we invest in, which are more expensive.

Investing in alternatives and internalising investment management capacity is one of our strategies to minimise costs.

We also try to increase the share of low-cost investments – for instance, by investing in listed alternatives, by increasing co-investments and by limiting the use of funds of funds (we only use those for exotic markets). Another strategy is to invest in a slightly more concentrated manner.

We certainly face external pressure to reduce asset management costs. In Denmark, it comes primarily from the public through the media. We are often compared with our peers and we have to justify the level of costs that we have. I think we cannot do without that pressure, which is beneficial in many ways. But I’m also wary that the discussion is not always sufficiently nuanced. Investment costs have to be viewed in light of the long-term results we can achieve. But we cannot disregard the fact that our members are very cautious about cost, and we should be able to at least explain our strategy on this to our members. 

Of course we try to pass some of the pressure on to asset managers, by trying to negotiate terms with them, but it is not always easy. There are many instances where we choose not to invest because of costs. In other instances we are unsuccessful, and nevertheless still invest, because we see talent in those managers. I think, however, we have achieved a lot through negotiation. 

I would say it is more difficult to achieve cost reduction through negotiation in the investment management industry compared with other industries. That is because it is harder to judge both effort and skill on a short-term horizon. There tends to be   higher risk of misalignment of interest. Asymmetry of information and lack of transparency probably cost us and you could argue that investors get a little less for their money spent on investment management fees. 

Interviews conducted by Carlo Svaluto Moreolo