Economies of Scale Strongly Benefit the Largest Plans

Institutional investors with less than $1 billion in assets paid 65% more for investment management than medium-size funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets), Callan found.

Institutional investment management fee payment practices and trends are the subject of the Callan 2017 Investment Management Fee Survey.

The research reflects trends in 2016 fees assessed by 59 U.S. funds and trusts and 279 investment management organizations, the firm explains.

Overall the most frequently cited concern regarding fees is “whether or not active managers are providing the value-add to justify the fees.” Also important at a high level, Callan finds a 15% decrease in use of performance-based fees among investment managers since 2014. Even with greater concern voiced about the justification of active management fees, the majority of the assets owned by U.S. fund respondents, 69%, are actively managed. This is down from a high of 84% in 1996.

The median fee charged for investment management, according to Callan researchers, is 38 basis points. This figure does not tell the whole story, as the investor fund type seems to have a big impact on the fees paid. In fact, the data shows a median 36 bps fee for public funds, a 68 bps fee at the median for endowments and foundations, and a 37 bps median for corporate funds. The median investment management fees paid by endowments/foundations in 2016 was up 24% over 2014.

The research suggests median investment management fees vary quite widely by asset class, as well. For fixed income, it is 21 bps; for U.S. equity, 34 bps; for global equity, 45 bps; and for alternatives, it is 90 basis points. Managers seem to be urging more clients to allocate more to the alternatives category, as the increase in allocations to alternatives since 2014 has been significant. For public funds, investments in alternatives are up 17%; for corporate funds, 17%; and for endowments and foundations, 6%.

Highlighting a well-established industry fact, Callan says smaller funds paid a premium for investment management relative to other fund sizes: “Funds with less than $1 billion in assets paid 65% more than medium funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets).”

Digging into the data provided by asset managers, Callan researchers find managers’ allocation to bonuses as a percent of revenue in 2016 was 18%, down from 24% in 2014. The most dramatic change was seen in non-U.S. fixed income (down 19%), Callan reports, followed by hedge funds and global equity (down 13%, each). At the same time, the percentage of revenue allocated to cover the cost of operations increased dramatically, from 42% to 60%, on average. Manager profit margin as a percentage of revenue decreased from 34% in 2014 to 22% in 2016, on average.

The full report can be downloaded here.