New capabilities and expanded data set a new standard for institutional management fee analysis.
December 17th, 2019
By Scott Treacy, CFA
The active manager fee landscape is changing due to escalating investor belief that certain areas of capital markets are efficient. For instance, due to the substantial amount of investment analyst coverage of the large-cap public equity market, this area is thought to be efficient (where active management does not work). Consequently, there has been a massive adoption of passive portfolios that provide broad exposure to this area of the market, which has put an enormous amount of pressure on the management fees charged by active managers. The murky process of negotiation between asset managers and plan sponsors has been thrust into the spotlight and all actors are seeking more authentic information. Based on our analysis, there are distinct differences in active management fee levels when you view the information from a time, mandate amount, plan type, and asset class perspective.
The data we used for our analysis comes from the Investment Metrics performance reporting platform which includes over 20,000 institutional plans and approximately 500,000 portfolios. These are post-negotiated fee schedules across plan types that were agreed upon between asset managers and plan sponsors. The data is anonymized to ensure confidentiality and provides a more realistic picture of active management fee levels compared to the published fee levels offered by asset managers.
Across all large-cap equity portfolios (U.S., non-U.S., and global), we have seen the post-negotiated fee levels fall, at a median level, when comparing the figures from three years ago to today. For our analysis, we filtered the universe to include only those mandates above $100M, were actively managed, and included both separate accounts and commingled funds. This resulted in over 3,800 observations in U.S. large-cap equity, over 2,600 observations in non-U.S. large-cap equity, and over 975 observations in global large-cap equity.
The most significant decrease was seen in the global equity universe, where post-negotiated fee levels fell 5%. Within the U.S. and non-U.S. large-cap equity, the fee levels dropped at a more moderate pace, suggesting fees may have compressed prior to the period reviewed. It’s also interesting to note that, at a median level, the non-U.S. large-cap and global large-cap equity fees are approximately 35% higher than the U.S. large-cap equity fees. It would seem logical that over time, the fees across all large-cap equity portfolios would start to align. However, they are different in that the non-U.S. large-cap and global large-cap portfolios typically contain emerging market equity securities, which require added portfolio management skills to evaluate.
Once the large-cap equity portfolio mandate size reaches $50M, there is a clear change in fee levels as meaningful discounts are incorporated into the larger asset size. We filtered the universe to include only those portfolios that were actively managed, and included both separate accounts and commingled funds. When comparing the median post-negotiated fee levels for mandates between $0-50M and those between $50-$100M, the decrease in median fees were in the double digits for U.S. (-11%) and non-U.S. large-cap equity (-14%) portfolios. Interestingly, we did not see the decrease for global large-cap equity portfolios until the mandate size reached $100M (-14%).
When reviewing the post-negotiated fee levels across plan types (corporates, publics, endowments & foundations, and Taft Hartley’s) within the global large-cap equity, there were distinct differences at the median level. For our analysis, we filtered the universe to include only those mandates above $100M, were actively managed portfolios, and included both separate accounts and commingled funds.
The public and endowment & foundations (E&F) median fee levels are approximately 15% lower than the corporate and Taft Hartley plans. Also, the lower 25th percentile fee level for both publics and E&Fs may be the result of an increased adoption of quantitative strategies compared to the other two plan types. Quantitatively oriented strategies, typically, offer lower fee levels compared to fundamentally driven portfolios. From a plan allocation perspective, we have seen corporate plans be the most aggressive in de-risking their portfolios by shifting heavily into U.S. fixed income from equity. As a result, they may be more aggressive when it comes to their global equity allocations and willing to pay a higher fee for out-performers.
For asset managers, the largest active management fees come from their public equity portfolios as well as other esoteric fixed income portfolios. Again, we filtered the universe to include only those portfolios above $100M, were actively managed, and included both separate accounts and commingled funds. The U.S. junk bond and U.S. large-cap equity portfolios have median post-negotiated fee levels that were almost double the fee that U.S. broad market fixed income portfolios achieved. Once you go outside of U.S.-only portfolios, the active management fee level gets even higher. Presumably, this is the result of the added difficulty in evaluating securities in foreign markets.
In closing, the difference between the active management fee levels may seem insignificant because the figures are in basis points (i.e., one-hundredth of one percent). However, once you incorporate the mandate sizes, these differences can save a plan millions of dollars in fees paid or add millions of dollars in revenue for asset managers. Ensuring these rates are at the most appropriate level will become increasingly important as active management fees face more scrutiny.
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