Frithjof VanZyp

bfinance, the independent investment consulting firm, has released its latest report, “Investment Management Fees: Fairness Revisited,” with a comprehensive analysis of current trends and challenges in investment management fees and costs across various asset classes.

The authors argue that, as macroeconomic conditions and market circumstances change, investment fees and costs can be re-evaluated productively. The three main themes that the report focused on include: the rising costs associated with ESG resourcing (‘escalating ESG expenses’), slow-to-adjust hurdle rates for alternative investments (‘hurdle rate headache’), and a renewed focus on generating savings (‘room for reductions’).

The report commences with a broad look at fees—and trends in those fees—across a range of asset classes. In public markets, fixed income fees have compressed since the pandemic (average Investment Grade Bond strategy down to 21bps, average High Yield Credit down to 37bps). Yet higher interest rates and positive flows into Investment Grade bonds have eased pressure on many active managers. The shift from active to passive equity strategies is less dominant as a trend than it was during the 2010s, reducing pricing pressure: Emerging Market Equity fees are down a little to an average of 65bps, but Global Equity fees are unchanged. In private markets, high investor appetite helped asset managers to resist fee reductions in the 2010s, but weaker fundraising in 2022-2023 has strengthened investors’ negotiating positions: the changes so far are subtle, such as significant extensions to ‘first-close discounts,’ and are not yet reflected in clear falls in pooled fund pricing.

According to bfinance’s Australia Senior Director Frithjof Van Zyp, Australian investors are globally recognised for their strong fee negotiation skills.

“This, coupled with ongoing regulatory pressure, has resulted in significant fee compression. After securing favourable terms, especially for new investments, investors often hesitate to pursue further fee reductions to avoid straining relationships with their managers and a perception that little room for negotiation remains,” Mr Van Zyp explains.

“However, recent interactions with investors reveal that opportunities for additional outright savings still exist within their portfolios. We have also seen many instances where fee tiers can be adjusted to reflect continued growth in funds under management and lead to savings further down the road.”

Escalating ESG expenses

New research covering more than 650 Asset Owners and Asset Managers highlights pressures and differences of opinion. Nine in ten Asset Managers have increased their ESG-related spending relative to other spending over the past three years, driven by factors such as costly climate data and regulatory requirements. Yet how should these resources be paid for? Two thirds of Asset Owners believe that ESG resourcing should not affect a strategy’s price, but fewer than half of Asset Managers (and only a third of contributors from Real Asset investment houses) agree. Only 42% of Asset Owners are satisfied with the “level of transparency” from their Asset Managers on ESG-related costs.

Hurdle rate headache

Despite higher risk-free rates, hurdle rates for hedge funds and private markets have largely remained static, though there is some evidence of change – particularly for Separately Managed Accounts. In sectors where expected returns have increased directly as a result of the higher-rate climate, such as Hedge Funds and Private Debt, the lack of change in hurdle rates results in greater overall fee leakage and a higher percentage of overall return going to the GP. This raises questions of fairness. Only 27% of hedge funds, by bfinance’s count, have a hurdle rate in place.

Room for reductions

Even where there is no prevailing downward trend in asset management fees, evidence from bfinance client fee reviews shows that there are still savings ‘on the table’. Tools such as Transaction Cost Analysis can provide new lenses for investors to address negotiation opportunities. Importantly, the greatest improvements may not necessarily be found where investors expect: low-cost strategies, for example, do not tend to draw as much attention as high-fee asset classes but have represented an outstanding source of savings in practice.

Duncan Higgs, Managing Director and Head of Portfolio Solutions at bfinance, said: “We are delighted to be able to share the newest instalment in our long-standing Investment Management Fees report series, examining key trends and themes in 2024. It is our goal to continually support transparency, rigour and fairness on this crucial subject. We hope that this research helps both asset owners and asset managers in serving the best interests of the underlying owners of capital.

For investors, improvements on fees and costs can deliver the ideal outcome: additional performance with zero additional risk; risk-free alpha, in other words. However, delivering savings is not straightforward, especially after more than a decade of cost scrutiny driven by both investors and their regulators. It can be difficult for investors to access cost comparisons that are suitably specific and customised: simplistic benchmarking can often be too generic. It’s also important to have insight on other subjects that can affect fee and cost discussions: product knowledge, flows, performance metrics, market conditions and more.”

The post New bfinance report calls for reassessment of investment management fees in new environment appeared first on AdviserVoice.

Duncan Higgs

A new asset owner survey conducted by the independent global investment consultancy, bfinance, has found that investors across the globe are grappling with cost management challenges amid persistent inflation, heightened ESG requirements and regulatory burdens. The Investors’ Costs and Fees report, dated July 2023, features data from nearly 200 asset owners (including pension funds, insurers, and endowments) in 22 countries.

The report found decreases in management fees but increases in other costs, including ‘ad-hoc’ asset manager charges and fund servicing, while the challenges of non-transparency and non-comparability remain widespread across many cost components and asset classes, with many investors dissatisfied.

Since the Global Financial Crisis, investors have benefited from cost-compressing factors including low interest rates, downward pressure on asset management fees, and improved cost transparency facilitated by regulation, industry initiatives and more. However, significant cost-additive pressures are now emerging.

In a rising cost climate, with high-interest rates, increased pressure for ESG compliance, and continuing market volatility, investors are pressured to achieve better ‘value for money’ in many areas without compromising on strategic goals. Run between 14th June and 21st June, this snap poll report aims to provide additional clarity on the views of the investor community during this demanding time.

Like-for-like Expenses

On a like-for-like basis, 34% of investors reported an increase in fund servicing costs over the past three years. The low size of these costs, relative to fund management fees, makes this increase more feasible. Regarding management fees, 46% say these fees have declined, however, nearly one in four have experienced an increase in ad-hoc expenses. ESG-related costs, and how to charge for them, are widely cited pressure points amongst investors. Further, some investors have observed higher ‘market impact’ costs following a period of market volatility and periodic fixed-income liquidity constraints.

Cost transparency

There is a high level of dissatisfaction with transparency across transaction costs for asset owners, with only 27% of investors happy with the transparency of market impact costs and 45% for trading/brokerage expenses. In contrast, 83% of investors are satisfied with the transparency of management fees, illustrating stronger adhesion to variable market impact costs.

Cost comparability

Even more than cost transparency, investors are dissatisfied with cost comparability. Looking at transaction costs, 14% of investors are happy with the comparability of market impact costs and 24% with trading/brokerage expenses. This dissatisfaction is also seen across management and performance fees, with 37% and 48% of investors dissatisfied with these respective costs.

Cost by asset class

Two thirds of investors are broadly satisfied with both the transparency and comparability of costs in fixed income, versus just 16% in private markets and 18% in liquid alternatives. Lack of transparency is a particularly significant problem in private markets, with 44% of investors not satisfied with the current level of cost transparency.

Duncan Higgs, Managing Director and Head of Portfolio Solutions at bfinance, said: “Although we’ve seen some investors making major strides on the subject of cost management, this report really illustrates how far the investment industry still has to go before it reaches high standards of ‘cost transparency’ and ‘cost comparability’ in the eyes of asset owners. This subject will likely come under greater scrutiny now that costs in many areas are rising – particularly in fees for fund servicing (custody, audit, legal) and various ‘ad hoc’ charges passed on by asset managers to their clients outside of the management fees. We still see real scope for investors to improve value for money, without compromising on strategic goals, in areas such as transaction cost analysis.”

Kathryn Saklatvala, Head of Investment Content at bfinance and report co-author, said: “We are very grateful to all of the senior investors who took the time to share their insights on cost management and cost transparency in the current market – this ‘quick poll’ had a remarkable level of participation over just a few days. The data and anecdotal comments throughout this report really illustrate the extent to which investors are now facing cost-additive pressures. This is a real contrast versus the previous decade, when low interest rates, downward pressure on management fees and improved (though still imperfect!) transparency helped considerably to reduce like-for-like costs for investors.”

The post Fees for super funds and investors on the rise appeared first on AdviserVoice.

Siddick will head up bfinance’s new Operational Risk Solutions advisory unit, based in the firm’s London office. He brings more than 14 years of experience in financial services, pensions and investments, most recently as head of EMEA Operational Due Diligence at Aon. He reports to Duncan Higgs, Managing Director and Head of Portfolio Solutions.

Siddick represents bfinance’s first senior appointment dedicated solely to Operational Due Diligence (“ODD”) matters. He will focus on enhancing and developing solutions designed to support investors’ operational risk requirements, both at the time of appointing external asset managers and over the longer-term as part of ongoing due diligence.

The move reflects the evolving ODD challenges faced by the firm’s asset owner clients—such as pension funds, insurers and endowments—who are seeking to conduct thorough analysis of external asset managers in order to protect against losses incurred through operational failures, such as fraud or blow-up. “While there have been significant improvements in asset managers’ operational control in the 10-plus years since the Global Financial Crisis, operational deficiencies still represent a major potential pitfall,” says Higgs. “Today we see growing complexities within areas such as cyber security.”

Higher allocations to alternative investments can also increase the ODD burden: these strategies bring further potential for exposure to differentiated risks such as those related to complex counterparty relationships, the use of leverage and private market valuation methodologies.

Alternative asset classes—particularly private markets—have represented an increasingly prominent portion of bfinance’s manager research. During the 12 months to June 30th 2021, 45% of all new manager searches initiated by bfinance clients were focused on private markets, including a number of less conventional sectors such as Trade Finance, Impact Real Estate, Equipment Leasing and high-yielding Real Estate Debt.

Siddick was formerly Head of EMEA Operational Due Diligence at Aon where he led the firm’s London based ODD group responsible for evaluating the operational risk of managers and funds held by Aon’s clients across the firm’s Advisory and Fiduciary platforms. He holds a Bachelor of Arts Degree in Economics from the University of Sussex and is a CAIA Charterholder.

Duncan Higgs, Managing Director and Head of Portfolio Solutions at bfinance, said: “We are delighted to welcome Matt to the team: he brings outstanding experience in the field. This appointment is an important step in the enhancement of the firm’s ODD capability as we look to support our asset owner clients with the challenges they currently face.”

Matthew Siddick, Senior Director and Head of Operational Risk Solutions at bfinance, said: “I take great pleasure in joining bfinance and engaging with the firm’s diverse global client base. As investors’ strategies become ever more complex and portfolios increasingly gain exposure to alternative asset classes, there is a growing operational risk burden. It is crucial for investors to be able to demonstrate that related operational risks have been evaluated, measured and monitored in a structured and well-documented fashion.”

The post bfinance builds operational due diligence capability with hire of Matthew Siddick as Senior Director appeared first on AdviserVoice.