Recently while working on some analysis for a client looking into product development within the International Large Cap Equity, I was surprised to see that post negotiated fees in the mandate had actually increased during the first half of 2020.
Previously we have noted fee reductions across all developed markets, as expected. Using Fee Analyzer to compare the post-negotiated fees (across all plan types and mandate sizes) of newly created accounts for the three years ending December 2016 to December 2019 we witnessed a fee reduction in this space. At the median level the post negotiated fees dropped 4%, from 70 to 67.5 basis points. (At the 25th and 5th percentiles the fee compression was 5% and 8% respectively.) We have also noticed a similar compression in stated fees on the Investment Metrics Global Database for International Equity products ($25m) of roughly 4% for products that had updated their fee schedules in 2020 compared to 2019.
When I compared the post-negotiated fees for new International Large Cap Equity accounts in 2020 to new accounts in 2019 however, the fees increased. The median fee for new accounts in 2020 (across all plan types and mandate sizes) was 73.3 basis points which is a 5 basis point, or a 7% increase, from 2019. While the highest fee ranges remained unchanged, at the lowest fee levels we saw a more dramatic increase from 24 to 44 basis points.
Diving into the data, we found that there were two components driving the fee increase. For one, there was a greater percentage of new mandates awarded to fundamental managers in 2020, who are typically paid a premium compared to quants. The other was the size of the mandates awarded. During the first half of 2020 there was an 8% increase in smaller mandates less than $25m and a 9% decrease in mandates over $100m.
The median fee for a portfolio over $100m is 18% less than a mandate under $50m. During the first half of 2020 89% of the new accounts were less $50m compared to 72% in 2019.