A pension fund that has 10 times more assets under management has on average 7.67 basis points lower annual investment costs according to a working paper from authors at De Nederlansche Bank, that explores the relationship between pension fund size and investment costs.
Written by Dirk Broeders, Arco van Oord and David Rijsbergen the paper finds that these economies of scale are solely driven by management costs.
Using a unique dataset of 225 Dutch occupational pension funds with a total of €928 billion of assets under management, the authors provide a comprehensive analysis of the relation between investment costs and pension fund size.
The dataset is free from self-reporting biases and decomposes investment costs for six asset classes in management costs and performance fees.
The key finding of the paper is that a pension fund that has 10 times more assets under management, has on average 7.67 basis points lower annual investment costs.
Moreover, the effect disappears when asset allocation is not controlled for, indicating that larger pension funds invest relatively more in asset classes with higher investment costs.
Economies of scale do, however, differ per asset class.
“We find significant economies of scale in fixed income, equity and commodity portfolios, but not in real estate investments, private equity and hedge funds,” the authors say. “We also find that large pension funds pay significantly higher performance fees for equity, private equity and hedge fund investments.
“We find that performance fees significantly impact investment costs for equities, private equity and hedge funds. For these asset classes, we find that a tenfold increase in size raises performance fees by 0.74, 41.49 and 33.36 basis points respectively.”
The paper looks at the decomposition of investment costs into management costs and performance fees for six separate asset classes: equity, fixed income, real estate, commodities, private equity and hedge funds.
To access the full paper click below