Article: How did interest rates impact Q2 fees, factors and asset flows?

Damian Handzy, Brendan Cooper | October 15, 2021

It is clear that over the last couple of years, asset manager fees have been down but with a wide range of disparity depending on firm size and investment types. At the same time, we saw a Growth-Value rotation earlier this year as equity outflows continue. All of our analysis is based on a significant amount of data we’ve collected from consultants, asset managers and plan sponsors – including 80% of the top investment consultants using our software tools.

Investment Metrics recently hosted a webinar featuring our research on Q2 fees, factors and asset flows. Here are the biggest takeaways from our research analysis.

1. Manager fees continue to drop across manager sizes

Our fee data is all post-negotiated fee data (not rack rates) represent the actual fees institutional investors are paying, and our factors analysis is based on our acquisition of style analytics at the end of last year.

We have found that over the last two years, fees have come down across multiple quartiles and at the median level. The interesting part is the break in fee performance based on manager size. Smaller manager fees have decreased by about 3% while mega managers at the tail end of the 25th and 75th quartile had a more significant fee decrease closer to 8%. In fact, mega manager fees came down across the board regardless of quartile break.

When comparing the two-year stretch between June 2019 and June 2021, we are seeing actively managed fees dip the lowest among separate account, core, large mandates over $100 million. At the same time, we are seeing some of the highest active fees for new mandates among separate account. Smaller mandates of less than $25 million have less of a need to discount and with a style tilt, where Growth with about a 10-bps difference over Value at the median level with performance as a key driver.

When it comes to terminated products versus new hires in international large cap growth, we found a 10% to 15% difference in the first half of the year. When comparing Growth to Value, then terminations for new hires, we’re seeing a dramatic drop – over 30% terminations over 70 bps new hires, down to about 50 bps.

2. Factors show Quality emerging as the true outperformer

We break a core set of seven individually-analyzed factor styles into more than 130 different sub-factors to measure Value as part of our default set. Sub-factors, in fact, do matter a great deal in determining what type of Growth was up, for example.

Following Value outperformance in Q1 of this year, we saw Value and Growth in an archetypal ping-pong match in Q2, with Value down and Growth up in April, a flip in May, and another flip in June. While July and August have shown Growth with large cap stocks outperforming, Quality with a defensive play has emerged among large cap and low volatility as the true outperformers.

3. Value outperforms Growth with growing interest rates

When it comes to the impact of interest rates, conventional wisdom says that if rates do not rise fast enough, then you do not really have a Value-Growth predictor. But when we analyzed the relationship between interest rates and specifically Value-Growth and performance, we found that when interest rates move in the US by more than 5%, Value outperforms Growth since growth stocks tend to have larger cash flows farther out in time.

For those months where we do have large increases in interest rates, Value should outperform Growth. In fact, for every 10% increase in the US 10-year rate, we see Value outperforming Growth by about 100 bps on a monthly basis. Interestingly, the sensitivity to interest rate movements is less in the UK, where increases need to be above 20% to get to a 100-bps difference in the Value-Growth story.

4. Quality outperforms during a regime change

The impact of regime change scenarios on factors cannot be underestimated. The withdrawal of US and Coalition Forces from Afghanistan showed three different factors emerge as consistent outperformers: Quality, with gross profits and assets sub-factors. For stocks that have high gross profits, the assets did well in particular. Historically, factor regime change has been investing in Quality, large caps, and low volatility stocks.

5. Allocation shifts in favor of equities

In looking at plan performance and allocations as of June, publics, endowments, foundations and high net worth all showed very strong performance, while Taft Hartley and corporates had 25% and 17% returns respectively. However, health and welfare has lagged tremendously. What allocations impacted those returns?

Across six main mandates by plan type, it is clear that equity allocations are outperforming fixed income where corporates and health and welfare are heavily invested. Over the last year, equity allocations have been up while fixed income allocations have been except for high net worth. The only other material change was alternatives, where we are seeing a slight pull-back in favor of equities and fixed income, and more liquid investments.

Another key trend is the movement of corporate plans and E&Fs from the US-International split to global, signaling a move away from home-country bias. In fact, corporate plan US allocations have come down while global has gone up, while E&F international allocations are dipping in favor of global.

6. Asset flows out of active equity with positive market performance

For more than five years, we have seen asset flows coming out of active equity. Allocations are up about 5% over the last 12 months, but given the positive market performance, it has led to sizable outflows. We are on pace to see all-time high flows out across US International, Global, and Emerging Market equity as stocks continue to hit the higher end of their targets.

We also saw a significant reduction between terminations, big new mandates, and a wide range of fees. Median fees are coming down, but the ranges are considerable. The smallest managers continue to command premium fees, with style managers over core.

See the Investment Metrics difference

This research is done by Investment Metrics, a leading global provider of investment analytics, reporting, data, and research solutions that help institutional investors and advisors achieve better financial outcomes with clear investment insights. With over 400 clients across 30 countries, our solutions drive insights across 20K+ institutional asset pools, 28K+ funds, and 910K+ portfolios representing $14T+ in AUA. To learn more about this topic, please watch our webinar on Q2 Fees, Factors & Flows.


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Investment Metrics, a Confluence Company, is a global leading provider of investment analytics, reporting, data and research solutions that help institutional investors and advisors achieve better financial outcomes, grow assets and retain clients with clear investment insights.