Fee negotiations put asset classes under pressure

Price competition in asset management is coming under pressure as investors undertake fee negotiations with several asset classes reporting substantial falls as a result.

According to a report by bfinance, the biggest falls were seen in fixed income funds with global emerging market debt (EMD) and absolute return bonds reporting double-digit falls.

EMD fees saw a 10% drop in median quoted fees while absolute return bonds saw falls of 15% as the sector matured.

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“EMD pricing, which proved exceptionally resilient until 2016, is now falling with a subsequent 10% drop in median quoted fees. The last three years have seen a swing in favour of investors, whose position was strengthened by last year’s outflows,” the report said.

 “Maturation of the unconstrained bond sector has brought fees down by 15%. Initially, strong demand and a heterogeneous universe supported strong pricing, with diversity of manager/strategy type inhibiting comparison. Yet the maturation of the sector has brought a decline in median fees.”

Fees for global equity funds fell by 4% since 2016 with the median quoted fee for a $100 million mandate being 55bps. For global emerging market equities, fees were down 6% since 2016. Bfinance said the median quoted fees of a $100 million global emerging market equity mandate was 74bps, although there was ‘considerable scope’ for downward negotiation.

As well as price negotiations, bfinance said mandate consolidation could be an effective method of achieving savings as well as manager performance analysis.

Mal Hunt, managing director and head of portfolio solutions at bfinance, said: “Falling fees in particular asset classes can represent a potential opportunity for investors who appointed managers several years ago to re-evaluate their spending. Improving value for money continues to be a huge priority among the pension funds and other asset owners we work with.

“We have seen a big increase in demand over the last year for more granular, tailored fee benchmarking from investors that are looking to understand whether they’re actually getting value for money and, where relevant, renegotiate fees or replace managers. It is crucial not to analyse costs at an overly superficial level and instead consider the whole picture including hidden costs, performance attribution, the overall leakage in complex fee structures and more. It is also crucial to remember that long-term net return, not cash spent, is the most important metric.”

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