(October 9, 2013) – Pooled fund managers are finding it harder to justify higher fees, as institutional investors increasingly turn to segregated mandates, a Cerulli report has found.
While just 4% of pooled fund vehicles saw their fees fall in 2012, 35% expect a decline in charges of the next 24 months.
The report also found that more investors are using segregated mandates than ever before, and that asset managers expect charging levels for those vehicles to remain broadly the same.
“The pooled fund model that many asset managers grew up on is not dead in Europe’s institutional marketplace, but it is struggling to justify its role for the largest of allocators, who overwhelmingly demand separate accounts,” said David Walker, the European Institutional Investor 2013 report’s author and senior analyst with Cerulli Associates.
His colleague Laura D’Ippolito added: “Often European institutions are paying lower fees for the segregated accounts than they do for pooled vehicles. Institutions offering large mandates to managers for segregated accounts have significant bargaining power when it comes to charges.”
Survey respondents were asked how their clients’ use of segregated accounts had changed during 2012, and 44% claimed the use of these vehicles had increased.
Another 48% said their clients’ use of segregated funds had remained at the same level when compared to the year before, with just 8% reporting a decrease in use.
The push towards segregated mandates isn’t solely being driven by institutional investors seeking value for money however—regulation is playing its part too.
Insurers eyeing the imminent arrival of Solvency II regulations will have to be able to identify quickly and accurately the characteristics of instruments they are invested in to calculate the capital charge they must make, which can prove challenging in pooled funds, Cerulli noted.
Similar concerns are being faced by European banking institutions with Basel III’s capital requirements.
In addition, German institutions may prefer individual management—normally via “Spezialfonds”—because local regulation treats many pooled vehicles, whether onshore European or offshore, as equity participations.
The report identified that many asset managers had already introduced new fee structures for institutions, including offering management fees that taper as assets grow, and mixtures of fixed and performance charges with hurdles on the incentive fees.
But the model of claw-backs or deferrals of performance fees that arose in the global financial crisis had failed to take off, with barely one-fifth (22.2%) offering it.
The full Cerulli report can be found here.
It’s not just pooled fund managers which believe their fees will have to change: alternative managers are feeling the pinch too.
Last month, State Street and Preqin found 22% of alternative managers were considering changing their fee structure.
Related Content: Transparency Demands Forcing Alternative Managers to Change and Fewer Funds and Lower Margins: the Future of European Asset Management