Active Management Fees in Public Equity Stabilize
Executive Summary
Investment Metrics, a Confluence Company’s Fee Analyzer is the industry’s leading source of post-negotiated manager fees. Fee Analyzer is an interactive tool used to benchmark 65 investment styles. The tool compares post-negotiated fees across many different plan types, mandate sizes, and asset classes. With Fee Analyzer’s reliable fee data, asset allocators and asset managers gain competitive insights, which in turn leads to better decision-making surrounding active management fees.
In this report, we spotlight fee trends for active managers across public equity and US fixed income. We examined separate account and commingled fund mandates between $20 million and $75 million. In total, more than 490 observations were utilized in this research report.
Active managers struggled in 2022 against their respective benchmarks, at a median level. Unsurprisingly, active management fees decreased compared to three years ago, across the Investment Metrics active manager peer groups we reviewed.
Highlights
- Active managers struggled to perform in 2022’s down market.
- Post-negotiated active management fees have fallen, at an average level, over the past three years in non-US large-cap equity, emerging markets equity, and US broad core & core plus fixed income peer groups.
- US large-cap equity active managers maintained their average level over the three years. This is most likely due to those active managers remaining with mandates demonstrating the value they bring with regards to research and stock selection.
Poor Performance by Active Managers
Both public equity and fixed income markets struggled in 2022. In particular, growth stocks and emerging market equities were atrocious over the calendar year. Surprisingly, the Bloomberg Barclays US aggregate fixed income index also performed poorly. Normally, the fixed income asset class protects investors when equity markets crater, but that did not happen in 2022. Unfortunately, at a median level, active managers were not able to perform well in this environment based on data from the Investment Metrics (IM) active manager peer groups. However, it is important to note that the wide range of returns between the 75th and 25th percentile performance figures does demonstrate that some active managers navigated this volatile market effectively. The best active returns in the calendar year came from managers in the US large-cap value peer group. Some of the top performers include
Federated Hermes Strategic Value Dividend portfolio, Marshfield Associates Equity portfolio, and Logan Capital’s Concentrated Value portfolio. Over the longer-term, three years, we saw positive active returns from active managers in the US large-cap value, emerging markets equity, and US broad core & core plus peer groups.
Active Management Fees Stabilize
We examined the post-negotiated fees for active managers comparing the average fee for mandates between $20 million and $75 million over the past two years. Included in the analysis were both separate accounts and commingled funds. Fees within public equity seem to have stabilized over the past year. We only saw a one or two percent decrease in the average post-negotiated fee. US broad core & core plus fixed income asset managers saw the largest percent decrease over this period. In addition, we compared the average post-negotiated fee to the average stated fee for $50 million-mandates (stated fees are entered into the Investment Metrics global database by asset managers). Predictably, there is a difference between stated fees and actual post-negotiated fees. There is a large different in the emerging markets equity active manager universe. We expect the stated fees in our Investment Metrics Global Database to come down for emerging markets equity active managers to be more in-line with reality.
Active Management Fees Going Forward
Over the past three years we have seen active management fees decrease, but this trend has moderated over the past year as active managers demonstrate their research and stock selection capabilities. Those active managers that were not able to perform in the down market of 2022 will most likely see their assets go to passive strategies, or to other active managers that performed well in this difficult environment. Within US large-cap equity we have already seen the trough with post-negotiated active management fees. Those active managers that have demonstrated their research and stock selection capabilities should begin to push back against fee compression, and look for top quartile fees compared to peers.
Conclusions:
- Active management fee compression will start to moderate because good performing active managers will retain their assets.
- Top performing active managers should start to negotiate for higher fees because of their demonstrated ability to navigate a difficult capital market environment.
- Stated fee levels should start to decline to become more in line with post-negotiated fee levels.
Disclaimer
The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar.
This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision.
Investment Metrics, a Confluence company, does not provide investment advice and nothing in this document should be considered any form of advice.
Investment Metrics, a Confluence company, accepts no liability whatsoever for any information provided or inferred in this document.
About Investment Metrics, a Confluence company
Investment Metrics, a Confluence company, is a leading global 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. Our solutions drive insights across 20K+ institutional asset pools, 28K+ funds, 910K+ portfolios, representing $14T+ in AUA. With over 400 clients across 30 countries and industry-leading solutions in institutional portfolio analytics and reporting, style factor and ESG analysis, competitor and peer analysis, and market and manager research, we bring insights, transparency, and competitive advantage to help institutional investors and advisors achieve better financial outcomes. For more information about Investment Metrics, a Confluence company, please visit www.invmetrics.com.
