Will manager fees go up this year?
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As asset values have shrunk, so have manager fees. Should pension funds expect fee rises from their asset managers?
Managers typically charge fees based on a percentage of the assets under management. If these assets reduce in value because of market moves, so do the fees in pounds and pence. In recent months, both equities and fixed income have lost value, but fixed income in particular has seen reductions last year, and plummeted after the autumn Mini-Budget.
Any fee changes would form part of a longer-term trend. In September, fee research firm Fitz Partners reported that gross revenue earned from management fees of asset managers in Europe fell by 10% over the previous three years. The research covered more than 1,300 funds with $1.7tn (£1.4tn) of assets under management.
Scope for operational efficiencies
It is not clear if managers changed their fee structures in response to the events of September and October last year, but many expect that commercial pressure on managers will increase. This could force some managers to either adapt – or be swallowed.
Independent trustee David Butcher noted that “the majority of small to medium-sized asset managers are still very inefficient operationally and are still lacking massively in automation”.
Operations-wise, the top end of the market is dominated by BlackRock’s Aladdin software, with Amundi having started to compete in that space. Systems like Aladdin automate all aspects from portfolio to risk management and any breaches.
“But at the small to medium end there is still a lot of scope for improving operating margins. This is what the asset managers are going to be forced to do,” Butcher said.
This end of the market still involves manual intervention and use of spreadsheets, and so “there is huge potential for improving operational leverage, in other words reducing costs to improve margins, which are being squeezed from a price viewpoint at the other end”, he argued.
'Some have hinted that fee rises are coming'
For Hemal Popat, an investment partner at Mercer, it is still too soon to identify clear trends in this area. There could however be changes afoot, as he added: “Some managers have hinted to us that fee rises are coming.”
Fixed income and particularly liability-driven investment managers will be most affected by lower fees “given where we are in the interest rate cycle”, he said, which lowers the value of bonds.
However, Popat noted LDI managers have minimum fee levels. These could start to bite for some pension funds with segregated mandates as asset values reduce.
Have you seen changes in fees or minimum levels starting to be applied?
