The proverb “You get what you pay for” rings true for active management fees. Our research team analyzed the Investment Metrics post-negotiated fee database (Investment Metrics Fee Analyzer) to see if there was a connection between fee levels and active manager performance. There was a clear relationship between active manager returns and the fees they obtain from institutional investors. Furthermore, Public plans paid lower fees compared to Corporate plans, Endowments & Foundations, and Taft-Hartley plans by a significant percentage in some peer group universes.
The Investment Metrics Fee Analyzer database is an analytical platform that gives users the ability to examine post-negotiated fee levels across many different institutional peer groups. We evaluated US Broad Core and US Broad Core Plus fixed income, Global large-cap equity, US large-cap growth equity, and US large-cap value equity active manager peer groups. We included mandates between $10M and $100M in our analysis.
It appears that institutional investors who are paying higher fees are getting their money’s worth. We compared the average fee levels for those active managers who were in the 1st, 2nd, 3rd, and 4th quartile rank against peers based on their 3-year annualized return figures. Not surprisingly, those portfolios that were in the 1st quartile rank had the higher average fee level. The lone exception was the US large-cap value universe where the 4th quartile ranked managers had the highest average fee level. Global large-cap equity and US large-cap growth equity had the biggest difference in average fee levels between the 1st quartile performers and the universe.
Public plans were able to negotiate lower fee levels compared to other plan types. We compared the Public plan median fee levels to Corporate plans, Endowments & Foundations, and Taft-Hartley plans. In 3 of the 4 peer groups, we found that Public plans obtained the lowest fee levels. Notably, within Global large-cap equity, the Public plans had a median fee level over 30% lower than what we saw from the other plan types. Within the US Broad Core and Core Plus fixed income peer groups, Public plans had median fee levels over 10% lower than the Corporate and Taft-Hartley plans.
In closing, there are many factors that go into figuring out the appropriate management fee to pay an active manager. However, what is paramount in the decision-making process is performance. In the near term, those institutional investors that have been willing to pay higher fees have clearly benefitted from outstanding active manager performance against peers and the benchmark. It appears that Corporate plans and Endowments & Foundations have been more willing to pay above-market rates for good active management.