Date: 11th April 2017
In its survey on Pension fund fees, LCP concluded that pensions funds are paying asset managers up to 70% more than 6 years ago: “The total asset management fee for a £50m active global equity mandate funded in January 2011, has, on average, risen 70% in the 6 years since our 2011 fee survey, from £375k to £637k. This rise has largely been driven by the increase in equity markets.”
The report concludes that even though an asset manager delivers mediocre performance, fees will increase: “In most growth asset classes, we expect returns to beat inflation. Nearly all asset managers charge as a percentage of assets, this means that as long as performance has been good enough not to precipitate redemptions, asset managers can expect an above-inflation fee increase most years. The outcome for the manager, even with an unspectacular performance, is increased revenue. If the manager attempts to outperform, there is the risk it will not succeed and underperform, leading to investor redemptions and a significant loss of revenue. The typical fee structure, therefore, is skewed; it gives the manager an incentive to take little risk and to deliver index-like performance.”
According to LCP, investment companies are “not passing on the benefits of market growth and subsequent economies of scale to investors in the form of lower charges”. The report seems to confirm what the FCA had concluded in its Asset Management Market Interim report 2016. The authority pointed out a “ weak price competition” and denounced that active managers are rewarded by simply retaining clients assets and not necessarily achieving outperformance.
Since its last report in 2011, LCP has pointed out that fees rate have mostly been reduced ( out of 22, 13 asset classes have reduced their fees rates) but LCP also underlined that “while we welcome the reduction in fee rates in many asset classes, overall, investment managers are charging much more but don’t seem to be doing more”.
Regarding this increase, LCP tried to determine whether this increase was justified by a better performance and concluded that “there seems to be little evidence that managers who charge more deliver better performance. Indeed, the two highest charging managers in our sample achieved some of the lowest returns.”
The report also draws attention on a lack of consistent and transparent reporting on those transaction costs and denounces that some assets managers only provide information on explicit trading costs, such as broker’s commission and stamp duty. However, LCP points out that MiFID II and the upcoming guidelines from the FCA on information that asset managers must provide will encourage managers to become more transparent about those costs.