Thirteen of the investors polled for this month’s Focus Group are in favour of asset managers quoting an ‘all-in’ fee. This involves all fees and charges including transaction costs (as suggested by the UK’s Financial Conduct Authority). “There should be a reconciliation between the headline number and the all-in number,” according to a UK fund.
However, over a third disagree, with the CEO of a Swedish fund commenting: “We favour total transparency, to be able to discuss levels of income to the asset manager.”
Two-thirds favour an ad-valorem management fee with a scale factor, while under a quarter prefer a fixed management fee to cover the manager’s cost and performance.
Just under half say performance fees provide better alignment of interest between investors and asset managers, and help reduce investment costs. “Provided they are structured properly, they can work well, but not many performance fees are structured well,” says a UK fund.
A third say performance fees create perverse incentives for the manager, with a Swiss fund stating: “[Performance fees] make monitoring more complex, watermarks, performance fee period, etc. [It’s] worst when the fund performs [for] six months then has a higher drawdown, [as] you end with a negative performance and performance fees.”
Over half state that, when negotiating the level of performance fee, the investor should keep at least half of the alpha. “Any alpha split less than 80% investor/20% asset manager seems shocking to me,” says a French fund.
Almost two-thirds of respondents say cost transparency measures should be imposed: “Overall transparency is important to select a manager, taking into account that real active management has to be rewarded,” comments a Belgian fund. A third say investors should be required to comply with cost transparency measures.
Four in five say understanding asset managers’ business models, including cost structures, would help in making better choices regarding asset management charges. “I need to have transparency to be able to build a long-term relationship, asset owner to asset manager,” says a Swedish fund.
More than half consider asset management worse than other industries for value for money and alignment of interest. Nine say it is the same and just one says it is better.
Half have experienced regulatory and internal pressure to provide greater transparency on fees, as well as reducing them. A Dutch fund’s response to this involves “further negotiating down the costs, but at the same time also responding back to [our] end client that we are at the bottom, [to] manage expectations of major cost savings”.
Respondents are split on whether asset management is credibly addressing concerns about fees. “[Asset managers are] reluctantly more willing and understanding to lower fees if you start negotiations, [but] you have to take the first step,” states a Dutch fund.
Almost three-quarters of respondents say standardised fee reporting templates are an answer. A UK fund agrees, but warns: “In the long term [this is] not the holy grail, as one-size-fits-all rarely works for all asset classes”.
Over half of respondents pay between 25bps and 50bps annually in asset management fees. Six pay less than 25bps and four, 50-100bps. Two thirds say expenditure on asset management fees has decreased over the past five years.
Nineteen respondents assess the investment costs that the asset managers they employ pass on to them, with a UK fund referring to this as an “essential part of cost control”. Almost three-quarters say the asset managers they employ help them separate costs related to investments and asset management fees.