For an active global equity mandate that has matched the return of the global equity index, LCP found that an investor could be paying its investment manager as much as 70% more in fees than they were six years ago. This highlights how active managers are rewarded by simply retaining assets, and not necessarily to achieve outperformance.
“Investment managers have done very well out of increases in assets under management over recent years,” said Matt Gibson, Partner and head of investment research at LCP and author of the report. “However, this has been driven primarily by general rises in equity and bond markets. Whilst we welcome the reduction in fee rates in many asset classes, overall, investment managers are charging much more but don’t seem to be doing more.
“Our findings highlight just how important it is for pension schemes to regularly monitor their investment managers and put negotiating pressure on them to reduce fees.”
The LCP survey looks at total costs for a £50m investment across the most popular asset classes used by the firm’s clients. Of the asset classes covered by the survey, the highest average costs were for UK property at £590k, with passive UK equity coming in lowest at £38k. Some asset classes that are not regularly used by LCP’s clients, such as certain hedge fund strategies, have even higher charges.
For DC pension schemes, the survey identified the benefits of using platforms over accessing funds directly. For a £10m investment in a passive global equity fund via a platform, the fees were £5.5k lower.
The LCP survey also found a lack of consistent and transparent reporting on transaction costs. Some asset managers only provided information on explicit trading costs – such as broker’s commission and stamp duty. Others attempted to quantify implicit costs such as dealing spreads and the impact of the fund’s transactions on the market price of a security. The difference in minimum and maximum reported transaction costs from UK equity mandates varied widely with costs ranging from £20k to £400k for a £50m mandate. LCP attributes this wide range of costs to differences in the elements that are included, rather than real cost differences.
“Two regulatory changes may encourage managers to become more open about these hidden costs,” says Matt Gibson. “First, the FCA is in the process of setting out guidelines on the information asset managers must provide DC schemes on how transaction costs are calculated. Second is a MIFID II rule, tightening the regulations on broker commission costs related to research. Our discussions with investment managers suggest that most will opt to pay for these research costs themselves so it will no longer be an additional cost borne by investors.”
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