Funds are expecting to push for a further consolidation in the number of equity managers they use but intend to add alternative asset managers, a new Callan Associates survey reveals.
The survey also found that for most traditional asset classes the median published fees increased modestly or were flat relative to 2009, despite typically strong performances by external managers as markets rebounded from the financial crisis.
Callan Associates’ 2011 Investment management Fee Survey covers 50 sponsors representing $250 billion in assets, and 160 asset management organisations with $8 trillion in assets under management.
The survey found that the use of performance-based fees declined as an alternative to standard fee schedules among funds, with 35 per cent of fund sponsors paying performance-based fees for at least one account, down nearly 25 per cent from the last survey in 2009.
Anna West (pictured), head of Callan’s Published Research group, and author of the survey, says the funds are reviewing fees more often but are less likely to negotiate discounts with existing managers.
The survey found that 45 per cent of fund sponsors review fees at least annually, a substantial increase from 2009 (31 per cent).
“We did find an increase in fund sponsors examining their fees on a regular basis, which has gone up even in the past two years,” West says.
“As far as negotiation practices go, we find that most fund sponsors negotiate fees when they establish a relationship with a manager, and fewer fund sponsors negotiate with their existing managers on an ongoing basis.”
On average fund sponsors negotiate fees with 42 per cent of their new managers and 14 per cent of existing managers.
Across asset classes, sponsors reported the most frequent fee negotiations occured for core fixed income and US large cap equity managers.
But the survey found that negotiating a discount was getting tougher for funds, with 36 per cent of fund managers saying they do not offer discounts to clients with multi-mandate portfolios. This compared with 31 per cent in 2009 and 21 per cent in 2006.
Over the next 18 months more fund sponsors are expect to consolidate the number of managers they use in US large, small and mid cap equity mandates than in other asset classes.
Fund sponsors are also reported that they plan to add managers in alternative asset classes, particularly real estate, private equity, hedge fund of funds and commodities.
Commensurately, fund managers see the best opportunities for product expansion in these asset classes as well as in emerging markets, infrastructure and non-core fixed income areas.
The survey looks at published fee schedules of asset managers and the actual fees fund sponsors reported paying.
West says they invariably found the biggest discrepancies between these two figures at the larger end of the account scale.
“The largest differences are at the greater-than-$200-million account size, emerging market equities, US large-cap equities, and global active equities, [which] all had the largest discrepancies, which was around 20 to 22 basis points difference between published and actual fees,” West says.
“They have both the economies of scale and relationship discounts with these managers if they manage multiple mandates for the same clients.”
Compared to 2009, there were no major changes in the level of fees fund managers charged across the various publically traded asset classes, West says.
“What we saw was minor changes for both public and actual fees that were in the one to three basis point range and varied across account size and asset class,” West says.
“Longer-term trends told a more interesting story for publically-traded asset classes. Looking at seven-year trends we saw increases for domestic large-cap and small-cap equities; some substantial declines for broad-market fixed income, which includes core, core-plus and intermediate-type mandates. We also looked at non-US equity over this longer time period and those trends were more varied depending on account size.”
The survey found that in broader fixed-income, median fees for account sizes of between $25 and $50 million fell from 34 basis points in 2004 to 27 basis points in 2011, almost a 20 per cent decline.
For accounts of between $50 million and $100 million median fees went from 31 basis points to 25 basis points over the same time period.
Since the last survey in 2009, areas that experienced published fee increases included passive US large-cap equities, high-yield fixed income, active and passive non-US equity and active emerging market equity.
Small-cap active equity was the only asset class that saw marginal declines in publishes fees for multiple account sizes.
When it came to actual fees, the median actual fee decreased over the past two years for the smallest active US mid cap portfolios. Fees for the largest active US small cap, passive non-US equity and active global equity prices increased.