In this week's Technical View, Barnett Waddingham's Rod Goodyer explores how schemes can manage their investment fees.
Adviser fees may be monitored and reviewed regularly as invoices are received. But asset management fees, often paid to the manager directly from the existing assets, may remain in place for some time without review.
Three action points
Review the fee and total expense levels for your current managers
Ensure all reporting that you receive includes returns shown net of fees
Consider what potential you have for negotiating fee levels with your existing managers
In a world of low yields and low-growth expectations, pension fund investors should be increasingly vigilant as to the effect of management charges on their overall returns. For example, if your asset return was expected to be 10 per cent a year then a management charge of 0.6 per cent a year would represent 6 per cent of the overall return.
However, with reduced return expectations of 6 per cent a year, the same management charge would represent 10 per cent of the expected return.
There are a number of issues schemes should consider when looking at fees:
Are the current fee levels reasonable?
Fee levels for specific mandates may vary over time due to competitive pressures, efficiency savings or new approaches.
However, pension funds may not necessarily be aware of what other institutional investors are paying for similar mandates with other managers, or possibly even what terms their own managers are offering to new clients.
Although carrying out a full market review just to establish price levels may be a step too far, schemes can benefit from simply asking their consultant to confirm if current fee levels are in line with the market.
Are there opportunities to consolidate assets?
The size of an investment mandate can be a key factor in fee terms. Although manager-specific risk is diversified by spreading assets across multiple managers, schemes should also be aware this approach may increase costs.
There are often good reasons for a scheme to use multiple managers but efficiency savings could still be possible from simple steps such as consolidating passive or hedging assets with a single manager.
In addition, many companies now find they sponsor several UK pension schemes. Some fund managers will consider appointments to multiple schemes of the same sponsor as a single appointment when setting fee levels, again offering potential savings.
Can you negotiate lower fees with the incumbent manager?
Fund managers like winning new business and do not like losing assets, so do not be afraid to negotiate, particularly if you are in a position of strength.
For example, if you wish to invest in a small or new fund, the manager may offer lower fees while they are looking to build up their asset base or track record.
Likewise, if you are minded to remain with a manager who has performed poorly recently, they may consider making fee concessions to reward your loyalty – and likewise those with the best recent performance may be least willing to negotiate.
Some investors who are seen as prestigious names may also be able to negotiate lower fees.
Do you understand the overall level of costs?
The annual management charge disclosed by your fund manager does not necessarily cover all of the costs associated within the fund, such as administration, audit or legal fees.
However, these must be disclosed within the ongoing charge figure, which provides a better indication of the overall operational costs. By comparing the ongoing charge instead of the AMC, investors may get a better like-for-like comparison of funds.
Are active management fees providing value for money?
A simple step to monitor this is to insist that reporting received from your managers or advisers shows returns on a net-of-fees basis, so you can see what value the manager is actually adding. It may also be worth reviewing any performance fee to ensure it correctly aligns the investment manager’s interests with your own, because often this is not the case.
Many investors take the view active management can add greater value within certain markets or asset classes.
Investors should consider which mandates they expect to benefit most from higher active management costs and where a less active, or fully passive, approach may be appropriate.
Rod Goodyer is a partner at consultancy Barnett Waddingham
