Bfinance has released its latest report, “Investment Management Fees: Fairness Revisited,” with a comprehensive analysis of current trends and challenges in investment management fees and costs across various asset classes.
The authors argue that, as macroeconomic conditions and market circumstances change, investment fees and costs can be re-evaluated productively. The three main themes that the report focused on include: the rising costs associated with ESG resourcing (‘escalating ESG expenses’), slow-to-adjust hurdle rates for alternative investments (‘hurdle rate headache’), and a renewed focus on generating savings (‘room for reductions’).
The report commences with a broad look at fees—and trends in those fees—across a range of asset classes. In public markets, fixed income fees have compressed since the pandemic (average Investment Grade Bond strategy down to 21bps, average High Yield Credit down to 37bps). Yet higher interest rates and positive flows into Investment Grade bonds have eased pressure on many active managers. The shift from active to passive equity strategies is less dominant as a trend than it was during the 2010s, reducing pricing pressure: Emerging Market Equity fees are down a little to an average of 65bps, but Global Equity fees are unchanged. In private markets, high investor appetite helped asset managers to resist fee reductions in the 2010s, but weaker fundraising in 2022-2023 has strengthened investors’ negotiating positions: the changes so far are subtle, such as significant extensions to ‘first-close discounts,’ and are not yet reflected in clear falls in pooled fund pricing.
Escalating ESG Expenses
New research covering more than 650 Asset Owners and Asset Managers highlights pressures and differences of opinion. Nine in 10 Asset Managers have increased their ESG-related spending relative to other spending over the past three years, driven by factors such as costly climate data and regulatory requirements. Yet how should these resources be paid for? Two thirds of Asset Owners believe that ESG resourcing should not affect a strategy’s price, but fewer than half of Asset Managers (and only a third of contributors from Real Asset investment houses) agree. Only 42 per cent of Asset Owners are satisfied with the “level of transparency” from their Asset Managers on ESG-related costs.
Hurdle Rate Headache
Despite higher risk-free rates, hurdle rates for hedge funds and private markets have largely remained static, though there is some evidence of change – particularly for Separately Managed Accounts. In sectors where expected returns have increased directly as a result of the higher-rate climate, such as Hedge Funds and Private Debt, the lack of change in hurdle rates results in greater overall fee leakage and a higher percentage of overall return going to the GP. This raises questions of fairness. Only 27 per cent of hedge funds, by bfinance’s count, have a hurdle rate in place.
Room for Reductions
Even where there is no prevailing downward trend in asset management fees, evidence from bfinance client fee reviews shows that there are still savings ‘on the table’. Tools such as Transaction Cost Analysis can provide new lenses for investors to address negotiation opportunities. Importantly, the greatest improvements may not necessarily be found where investors expect: low-cost strategies, for example, do not tend to draw as much attention as high-fee asset classes but have represented an outstanding source of savings in practice.
Duncan Higgs, Managing Director and Head of Portfolio Solutions at bfinance, says:
“We are delighted to be able to share the newest instalment in our long-standing Investment Management Fees report series, examining key trends and themes in 2024. It is our goal to continually support transparency, rigour and fairness on this crucial subject. We hope that this research helps both asset owners and asset managers in serving the best interests of the underlying owners of capital.
“For investors, improvements on fees and costs can deliver the ideal outcome: additional performance with zero additional risk; risk-free alpha, in other words. However, delivering savings is not straightforward, especially after more than a decade of cost scrutiny driven by both investors and their regulators. It can be difficult for investors to access cost comparisons that are suitably specific and customised: simplistic benchmarking can often be too generic. It’s also important to have insight on other subjects that can affect fee and cost discussions: product knowledge, flows, performance metrics, market conditions and more.”