Investment Management Fees: Is Competition Working?

Why are fees falling in certain asset classes yet remaining resilient in others?

The answers to this question are not always straightforward. At its heart, the investment management industry is not one in which “price competition” functions efficiently, and the factors inhibiting or encouraging price competition vary considerably by sub-sector.

Our biennial Investment Management Fees report showcases a selection of areas where fees have declined significantly, which in 2019 include absolute return bonds, emerging market equity, emerging market debt and fund of hedge funds. It also highlights sectors that have experienced less movement on fee levels. The data is based on real pricing offered by managers for mandates, not surveys or ‘rack rates’.

Fee trends are always of interest, not least because average reductions can be helpful during negotiations or renegotiations with managers. Yet fee trends are not the only tool that an investor can wield when seeking better value for money. As such, this year’s edition of Investment Management Fees contains a second section examining other methods for driving cost efficiency, including proprietary data that we hope will prove useful to investors that are considering these approaches. They include:

• mandate consolidation, where effectiveness varies depending on asset class and quantum;

• deconstructing performance in new, more nuanced ways that illustrate ‘real’ alpha;

• using manager selection approaches that are likely to enhance (rather than dampen) price competition;

• understanding the hidden costs that affect net returns (including, but far from limited to, transaction costs);

• adopting different fee structures, where impact again differs considerably by sector;

• and the use of alternative routes to cost-reduction such as co-investment alongside private market managers.

Investors can use these methods to move the needle on cost, even in strategies that may not be subject to strong fee pressure overall. Many of these approaches essentially involve finding ways to create or re-frame the contest between providers, such that the investor can become a price-maker rather than
a price-taker. In an imperfectly competitive market, competition can be encouraged, enhanced and even engineered.