(June 4, 2013) — Paying for performance is one thing, paying someone a bonus to lose your money is another-and despite protestations, it is still happening in institutional investment.
Consulting and actuarial firm LCP’s fourth annual review of investment manager fees has found market returns, rather than the skill of a specific fund manager, remain both the main drivers of performance and the supplemental fees investors pay for the privilege.
A global equities mandate that had funded at £50 million would have started out costing £280,000 in fees, LCP said. Over the three years to the end of December 2012, when the market rose 22%, this fee would have increased to £330,000 for a manager who performed in line with the index. For one who outperformed, they could expect £20,000 more, but even fees paid to a manager who trailed the benchmark by 2% would have risen to £315,000, LCP said.
“The structure of flat fee arrangements means that the focus for managers is more on retaining clients than delivering additional performance,” LCP said.
So investors should opt for a performance fee arrangement then? The dice is loaded against you here too.
“The survey found that performance-related fees are generally not attractively structured for investors,” the firm said. “For the global equity universe, if a manager delivers its target return of 2% per annual above the benchmark return, it will earn more fees under a performance-related fee structure than it would under a flat annual management charge: we do not believe this is equitable.”
So investors lose out either way? It seems so, although clearly, every mandate, manager, and client is different.
Hedge fund fees are, on average, 10 times higher than those charged on passively managed strategies of a similar type, LCP reported. There should be a significant outperformance for those fees, but don’t bet your house on it.
For long-only managers, emerging market equities taking a huge lead as the asset class that costs the investor dearest. These funds cost almost 110 basis points per annum once a raft of additional expenses are added on to the annual management charge, which is already the highest in the group.
Transaction charges are supplemental to these costs, and fund managers told LCP it was too difficult for them to strip them out to either inform investors or the survey.
“Managers responses about transaction costs are rather disappointing, suggesting nearly two-thirds of managers are unable or unwilling to comply with best practice guidelines,” LCP said. “We look forward to managers providing better information in future.”
If this is all a touch disheartening, LCP said the tide might be turning. The firm explained: “There is some evidence that investors are challenging the levels of fees being charge, but more can be done, particularly as these fees are high in relation to the returns achieved. In an ever-competitive world, managers are willing to negotiate fee levels for new and existing clients.”
To access the LCP report, click here.
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