With the intense demand from U.S. institutional investors for the incorporation of environmental, social, and corporate governance (ESG) analysis, we have seen asset managers respond in a resounding way. Over the past five years, active U.S. based asset management firms have invested heavily to set up analyst teams and firm structures to ensure ESG analysis is part of their investment evaluation process. In fact, for a recent webinar, we reviewed 78 asset managers and all but one, or 99%, integrate ESG analysis. In recent years, there has been a particular focus on ESG analytical capabilities for emerging markets equity active managers. Seemingly, this inefficient area of the market would greatly benefit those asset managers who can evaluate ESG risks well. The big question is whether this investment is paying off for asset managers: have those asset management firms, who do a better job of evaluating ESG risk, been able to obtain higher post-negotiated fees compared to their peers?
The post-negotiated manager fee information is from the Investment Metrics Fee Analyzer, which has over 70,000 fee observations across 65 investment styles. For this analysis, we reviewed the fees of new emerging markets equity mandates that were awarded over the most recent three-year period through September 2021. There were 70 new mandates reviewed from 23 different products, representing 20 different asset management firms.
Summary of Findings
- In the emerging markets equity space, asset managers’ investment in ESG analysis has been paying dividends with new mandates and the potential for higher fees.
- The 23 emerging markets equity products analyzed against their MSCI ESG scores relative to the MSCI Emerging Markets Index compared favorably to the emerging markets equity peer universe.
- Asset managers are most focused on evaluating corporate governance risk, which was the most notable difference between those gathers that obtained above median fees and those below median fees.
The scatter plot below shows the emerging markets equity asset managers who gathered assets over the past three years. The graph compares the post-negotiated management fee to the mandate size on a weighted average basis. The median active management fee for the most recent mandates was 75 basis points (bps) and the median account size was $51M. As anticipated, the larger mandates had a lower management fee compared to smaller mandates. The average fee for those over $150M was 68 bps. Meanwhile, the average fee for mandates that were less than $50M was 84 bps. It is important to note that 87% of the new mandates were to asset managers who employ a fundamental analysis approach to security analysis compared to a quantitative approach. Generally, those asset managers with a fundamental analysis approach charge higher fees compared to quantitative asset managers.
To review the ESG scores for the products gathering assets, we used our Style Analytics Peer Style Skyline – a proprietary tool to demonstrate how a fund stands out from its peer group. The analysis shows that these asset managers have portfolios better positioned against ESG risks. The graph below shows the quartile breaks of the 23 emerging markets equity products and their MSCI ESG scores relative to the MSCI Emerging Markets Index. The way to interpret the chart is any figure greater than 1 or less than –1 has a portfolio that is significantly different from the benchmark for each specific factor. The “MSCI ESG Overall” median figure for this group of successful managers is 1. This compares favorably to the emerging markets equity peer universe median figure of .5 (See Appendix for the graph). Interestingly, the corporate governance piece of ESG analysis is the clear focus of these portfolios. Separately, and as expected, this group of leading emerging markets equity managers have three- and five-year annualized returns that are superior to the overall peer group.
Lastly, we examined MSCI ESG scores of those emerging markets equity managers who were able to negotiate above median fees with institutional investors. The noticeable difference between those asset gatherers that obtained above median fees and below median fees is in evaluating corporate governance. Even the 5th percentile ranked manager in the group, able to charge above median fees, has a corporate governance figure exceeding 1.
In closing, it appears that within the emerging markets equity space, that asset managers’ investment in ESG analysis has been paying dividends with new mandates and the potential for higher fees. Asset managers are most focused on evaluating corporate governance risk, which is the easiest to evaluate given the amount of data available. Hopefully, as data becomes more readily available on environmental and social factors, these scores will also improve.