Public Funds Fare Well on Fees

December 22, 2003 (PLANSPONSOR.com) - Preliminary results of a new consultant survey suggest that public defined benefit funds are getting a better price on investment management than their corporate brethren.

The study conducted by the Independent Consultants Cooperative (ICC), a consortium of independent investment consulting firms, considered the range of fees paid for broad investment product categories by different kinds of investors among clients of consulting firms that belong to the ICC, which is currently comprised of seventeen firms located across the country, including Cambridge, Massachusetts-based New England Pension Consultants and St. Louis-based Summit Strategies.   None of the ICC member firms offers investment management services.  

In general, the analysis disclosed that, among the sponsor types considered, public defined benefit plans paid the least and the owners of private wealth paid the most for investment advisory services.

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Product Analysis by Plan Type

Median Fees in Basis Points

Large Cap

Mid Cap

Small Cap

International Equity

Fixed Income

Corporate DB

49

79

84

64

27

Public DB

46

60

87

48

31

Nonprofit

51

77

98

58

28

Taft-Hartley DB

44

80

44

Private Wealth

60

100

58

The preliminary results suggest that, while managers’ fee schedules are typically graduated, there was what the report’s authors described as “surprisingly little correlation” between portfolio size and the advisory fees actually paid.   Moreover, regression analysis considering fees relative to portfolio size, plan sponsor type, and style did not explain a significant amount of the variation in fees, according to the ICC.

Nonetheless, some broad relationships seem to hold true across the sample of over a thousand portfolios reviewed – median fees for portfolios under $10 million were generally higher than median fees for portfolios between $10 million and $30 million, which were in turn higher than median fees for portfolios over $30 million.

The ICC data indicates that the median fee for domestic equity portfolio management is progressively higher for the large-cap, mid-cap, and small-cap investment strategies, while international equity fees were generally lower than those for small-cap offerings.  

Fixed-income fees for all products considered, including high yield fixed-income products, were significantly lower than equity fees, with average fees of 27, 29, and 39 basis points for core, intermediate, and high-yield offerings, respectively.

Cross-Product Analysis

Product

Median Fee (Basis Points)

Domestic Equity - Large Cap

50

Domestic Equity - Mid Cap

76

Domestic Equity - Small Cap

90

International Equity

74

Fixed Income

30

In the domestic equity arena, the ICC study demonstrated that the highest fees were paid for growth strategies.

Domestic Equity Analysis by Style

Median Fees in Basis Points

Large Cap

Mid Cap

Small Cap

Core

50

73

80

Growth

53

76

100

Value

50

75

85

The ICC contributed representative data on actual manager fees paid last year for over a thousand actively managed separate portfolios for clients of ICC consultants. These observations were compiled into a database and analyzed in many different "universes" of manager fees paid. The ICC says it plans to complete a more detailed study early in 2004.

You can find out more about the ICC at www.icc-group.com

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