Kathryn Saklatvala

Independent global investment consultancy, bfinance, has released its biennial global asset owner survey, identifying the priorities of more than 300 senior investors, with a combined AuM of over US$7 trillion in assets across 39 countries. With rising geopolitical uncertainty, technological opportunities, and a challenging market environment, asset owners are increasingly focused on resilience, impact, and private market opportunities.

Asset owner performance

Only 62% of investors say that their institutions’ investment performance met or exceeded long-term return objectives through the turbulence of 2022-2023. In 2024, however, there’s a slightly more optimistic tone, with the figure estimated to be 88%. While managers in private market asset classes (private debt, infrastructure and private equity) still demonstrated the strongest satisfaction ratings in 2024, satisfaction was significantly lower than in 2022. Investors relayed high satisfaction with active fixed income manager performance, with 83% in investment grade bonds, but only 35% of investors were satisfied with real estate managers – a huge decline compared to 2022.

Investment portfolios

Private markets remain central to investment strategies, with 53% of investors planning to increase exposure over the next 18 months. Infrastructure and private debt are leading areas of interest, capturing 36% and 35% of new allocations, respectively. Notably, interest in secondaries is growing, with 37% of investors boosting exposure as they seek liquidity options within illiquid asset classes. However, satisfaction with private equity managers has dropped significantly from 94% in 2022 to 69% in 2024, suggesting increased scrutiny of GPs.

In private markets, nearly half (47%) of investors expect a reduced ‘illiquidity premium’, expecting this to be lower in 2020-2040 than it was in 2000-2020. Meanwhile, 37% are in the process of boosting exposure to secondaries and more than a quarter of those are new entrants to the space, among other strategic changes.

Equity portfolio diversification is a clear priority, as only 34% of investors expect the largest tech stocks to outperform broader indices in the coming year. Additionally, 34% of investors anticipate more diversification in their equity portfolio in the next one-to-two years across one or more of four lenses: style (22%), size (16%), geography (16%) and stock-level (14%).

Fixed income strategies are gaining momentum, particularly investment-grade bonds, with 22% of investors boosting allocations. In real estate, 62% of investors anticipate a moderate (59%) or substantial (3%) recovery in core real estate over the coming 12 months, following severe dislocation. However, investors’ predictions for property market recovery have no relationship with their asset allocations movements over the next 18 months. Meanwhile, emerging market exposures are declining, with 18% cutting emerging market equities and 11% reducing allocations to emerging market fixed income.

Opportunities and trends

Artificial intelligence continues to present compelling thematic opportunities, with 40% of investors viewing it as a strong investment theme. However, caution prevails, with a predicted market rotation away from large tech stocks. This reflects a growing focus on mitigating tech-related concentration risks through diversified equity strategies and broader AI investments.

Adoption of digital assets and cryptocurrencies remains low, with only 9% investing in them. In 2022 the figure was 8%, and 21% expected, at that time, to have exposure within five years.

Finally, although interest in impact investing is growing, adoption remains gradual. Currently, 27% of investors are engaged in impact strategies, with a further 26% planning to enter this space. 24% of investors will increase exposure to impact strategies. Climate transition remains a significant theme, with 40% of respondents identifying it as a strong investment opportunity. Biodiversity-focused assets are poised for growth, with a projected 200% increase as investors explore nature-based solutions.

Risk management

With 75% of investors emphasising the need to build portfolio resilience, managing risk has become a primary objective. Major areas of concern include geopolitical unrest (54%), prolonged downturns in risk assets (23%), and liquidity risks (19%). Investors are taking diverse approaches, with 22% already using equity overlays and another 9% planning to implement them to buffer against potential equity market corrections.

While investors are more positive on ‘risk assets’ (e.g. equities) than they were in 2022, there is a huge contrast between different institution types: only 4% of DB Pension Funds are underweight risk assets, in contrast with 37% of Insurers. Furthermore, investors are expecting ‘higher for longer’ rates compared to the current economist consensus: the average prediction for the Fed Funds rate at end-2025 is 3.4%, distinctly higher than the 3.0-3.25% figure in an October 2024 Reuters economist poll.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “The report reveals that in an increasingly uncertain world, resilience has taken centre stage for institutional investors. The focus on managing risks like geopolitical unrest, liquidity challenges, and prolonged market downturns underscores the critical need for robust strategies. From equity overlays to private markets and fixed income, we’re seeing investors actively recalibrate portfolios to navigate these challenges, balancing caution with the pursuit of opportunity in areas such as impact investing, infrastructure, and emerging technologies like AI.”

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Frithjof VanZyp

The latest Manager Intelligence and Market Trends report from independent global investment consultancy, bfinance, has found that investors are increasingly looking to improve diversification across regions, styles, and market caps amid market concentration. Investor activity in Q3 2024 reflected a continued emphasis on strategic asset allocation, with fixed income, private debt, and infrastructure proving essential in supporting portfolio resilience.

The report includes data on institutional investors’ asset manager search activity from bfinance’s investor client base across 45 countries.

Investor activity

Investor interest in equity manager searches remains strong, with equity mandates comprising 31% of new manager search activity through September 2024, a significant increase from previous years. In line with this, investors are seeking regional, sectoral, and stylistic diversification to mitigate concentration risk in tech-driven markets.

Private market asset searches have shown some stabilisation. Private debt, particularly direct lending, continues to see robust demand, accounting for 20% of all new mandates. Appetite for illiquid assets remains healthy, with infrastructure and renewables continuing to attract significant inflows.

Fixed income search activity remains steady, comprising 11% of searches, with increased interest in unconventional vehicles such as Sukuk bonds and Collateralised Loan Obligations, reflecting investor demand for more nuanced yield strategies.

While interest in diversifying strategies remains relatively stable, there has been a notable increase in demand for hedge funds, particularly those offering defensive diversification. However, defensive overlay strategies, including currency overlays, are gaining traction as investors manage non-local FX risks in increasingly volatile environments.

Risk snapshot

Risk appetite among asset managers held firm in Q3 2024, even as global macroeconomic conditions exhibited volatility. The bfinance Risk Aversion Index peaked in August, ending the quarter at 0.5 – near the ten-year average and slightly more cautious than in prior quarters. This reflects both sustained

engagement in riskier asset classes and ongoing adaptations to economic signals. With 2024 coming to a close, market participants are challenged with balancing growth-oriented positions against a focus on risk mitigation amid persistent volatility.

Portfolio design trends

Central to discussions in Q3 2024 was the Federal Reserve’s long-awaited rate cut, with other central banks, particularly in Europe, also reducing rates amid slowing growth. While the market response to these cuts was modest, investors are positioning portfolios in anticipation of a gradual decline in interest rates over the coming year. The report indicated that investors are focusing on hedge funds and equity overlays to guard against market downturns and emphasising resilience through strategies offering convexity and market independence.

Equity demand is on the rise, driven by the need for diversification beyond tech-heavy markets, as the S&P 500’s performance was largely led by the “Magnificent Seven” tech stocks. This raises questions about portfolio rebalancing, including factor exposures and geographical allocations.

Fixed income strategies benefit from elevated interest rates, with increased focus on duration and credit risk, while securitised credit is gaining attention amid concerns over leveraged loans and high-yield bonds.

In private markets, investors are broadly positive yet remain cautious, particularly in private equity, where slower distributions are creating liquidity concerns. Direct lending in private debt shows resilience, with returns of 9-11% net of fees, and portfolio designers are considering secondaries and semi-liquid structures to improve liquidity.

Manager performance

Active equity manager searches, which comprised 31% of new mandates, continue as investors reassess their strategic positioning. With the MSCI EM up 8.7% in USD terms, growth equities, particularly within the technology sector, drove returns, posing challenges for active managers as market gains remain concentrated within a narrow selection of stocks.

Fixed income, however, saw strong results across investment-grade portfolios, with US corporate bonds yielding 5.7% and Euro corporate bonds at 3.3% in Q3. High-quality bond performance was particularly noteworthy in emerging market (EM) segments, with EM hard currency debt yielding 6.2% and local currency EM debt returning 9.0% in USD terms, driven by currency appreciation and falling local yields.

Hedge funds led the field in diversification strategies, with convex and market-independent approaches favoured for their defensive attributes. There has also been an uptick in interest in currency overlays and climate-focused segments, including carbon trading, reflecting ongoing sustainability initiatives.

Frithjof van Zyp, Senior Director at bfinance Australia, said: “Throughout 2024, we have seen a noticeable increase in search activity, with strong momentum continuing into Q3. This activity has spanned across both public and private markets, with searches ranging from absolute return fixed income, global equities with tight tracking error due to the YFYS performance test, semi-liquid infrastructure for wealth clients, and convex or divergent liquid alternatives for downside protection.

“Manager fees remain a key consideration for our super fund clients, with close attention being paid to transaction costs to provide a holistic view of total expenses. Additionally, ESG considerations have become a prominent focus within our search parameters, reflecting the advancement of client SRI policies compared to a few years ago.”

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “Active equity managers are navigating a tough environment, with returns falling behind benchmarks in early 2024. This has intensified investor focus on diversification within equity holdings. On the other hand, we’ve seen significant momentum in fixed income and defensive diversification, with hedge funds offering market-independent strategies gaining prominence. ESG and climate-related investments remain high on the agenda for asset owners, even as the broader fundraising landscape moderates.”

ENDS

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Frithjof VanZyp

A new survey conducted by the independent global investment consultancy, bfinance, on the topic of endowment and foundation investment has revealed a challenging investment climate, asset allocation intentions, and the importance of ESG. The Endowment & Foundation survey, dated November 2023, features data from 61 asset owners from 16 countries.

Significant investment challenges

The surge in developed market inflation has had serious implications for endowments and foundations whose return targets are either directly or indirectly tied to domestic CPI and similar metrics. More than 40% of investors say their investment returns have been below target over the past three years (or below expectation, in the cases where no formal target exists but the entity has an expected long-term return).

The ‘average’ respondent invests 41% of their portfolio in private equities and 18% in bonds, with 35% in ‘alternative’ asset classes. Even more interesting, perhaps, is the data on current skews versus long-term strategic asset allocation. Some 52% of investors are underweight private equity while 37% are overweight cash. These figures indicate that temporary over-exposures to illiquid assets seen in late-2022 (the result of public market volatility) are no longer in effect.

Looking ahead, 62% of respondents expect to increase exposure to private markets over the next 18 months, followed by fixed income (31%), and equities (22%).

Outsourced operating models are popular but costs cause concern

The endowments, foundations and non-profits in this study tend to have highly outsourced investment models: 23% have a ‘fully delegated’ or ‘outsourced CIO’ (OCIO) approach, while a further 48% describe their investment activities as ‘strongly outsourced’ though not fully delegated. There is no notable trend towards insourcing or outsourcing at present.

The asset classes where respondents most commonly invest entirely via external managers are liquid alternatives/hedge funds (85%), private debt (85%), and equities (83%). Meanwhile, significant minorities use internal teams for most or all investments in currency overlay (28%), real estate (18%) and fixed income (17%).

On average, respondents are paying 0.6-0.7% of assets each year in investment-related costs (median 0.5-0.6%). External asset manager fees heavily dominate the overall picture and, for more than a third of respondents, represent over 90% of all costs.

Responses indicate a widespread desire to reduce cost. The vast majority of respondents agree (28% ‘strongly’, 62% ‘somewhat’) that they ‘should be paying less’ in investment-related fees than they do at present. While 49% “strongly agree” that monitoring and benchmarking costs is a high priority, only 10% express high satisfaction with their current approach to benchmarking asset manager costs/fees.

With regard to investor satisfaction with manager performance, some 63% of investors in externally managed ‘multi asset’ strategies are dissatisfied with performance in 2023 (though, interestingly, feedback on OCIO managers— who also have a multi asset remit—is more positive). Over 40% of investors in externally managed equity strategies are also dissatisfied. Conversely, feedback is more positive for managers in (typically high-fee) illiquid asset classes including private debt (88% satisfied) and infrastructure (83% satisfied).

Endowments and foundations drive ESG and impact investment innovation

Given that endowments and foundations have stakeholders that are orientated towards ethical responsibility and investor in these groups also enjoy fewer specific regulatory constraints, they have been driving some of the most innovative impact, ESG and climate-related investment programmes.

Some 80% of respondents say ESG considerations are ‘very’ or ‘moderately’ important to their investment strategy and implementation. A more granular and informative picture can be gained through examination of specific ESG-related practices across asset classes.

Notably, while equities remain the dominant asset class for most of these practices, ‘impact investing’ shows a strong private market focus. 97% of equity investors integrate ESG into the investment process in this asset class, followed by fixed income (79%), private markets ex. real estate (58%), private real estate (48%), and hedge funds (15%).

It is instructive to contrast the data on practices with expectations that investors have for external asset managers in these asset classes. For example, 84% indicated that they have some sort of carbon-related objective in equities, but only 50% would be “unlikely to hire” an equity manager who cannot report on carbon or greenhouse gas emissions/intensity for the portfolio. Similarly, 92% indicated that they do “active engagement/stewardship” in equities, but only 47% would be “unlikely to hire” an equity manager who cannot demonstrate specific outcomes for engagement.

A significant proportion of this community invest in explicitly impactful strategies, particularly in private markets. Within this cohort, 38% are willing to accept a somewhat lower financial return for an impact investment. These investors are generally seeking both social and environmental impact (55% indicate that they’re equally interested in both), though a minority of respondents primarily look for one or the other.

Frithjof Van Zyp, Senior Director at bfinance in Australia, said: “Within our inaugural Endowment and Foundation Investment Survey, interesting insights have surfaced. With 42% expressing dissatisfaction over investment returns, 62% anticipating a strategic shift towards greater exposure to private markets, and 57% highlighting the critical role of ESG considerations in shaping investment strategies, the landscape is evolving. These findings offer valuable perspectives on how the non-profit community is navigating inflationary pressures while balancing performance, diversification, and sustainability in their investment approaches.”

Kathryn Saklatvala, Head of Investment Content at bfinance and lead author, said: “It’s a privilege to be able to examine the challenges and trends within the endowment, foundation and charity investor community at this interesting time. Inflationary conditions and higher interest rates affect different groups of investors in different ways and there is evidently still a strong relationship between inflation metrics and return targets for many of these entities, which has contributed to a significant degree of under-performance.

This investor community has long been recognised for its ability to foster innovation and creativity, thanks in part to liability profiles and lighter regulatory constraints than we often find in the pension and insurance sectors. US endowments’ historic activity in illiquid investments is one often-noted example of this effect. More recently, we have seen this group developing some of the most interesting and forward-thinking impact and climate-oriented investment programmes that we’ve yet seen. As such, the third section of this three-part study focuses on ESG and impact investing.”

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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.”

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Kathryn Saklatvala

Key points:

• Nearly half of investors had direct exposure to Russia heading into Q1 2022, of which 45% have either fully exited or are trying to do so.
• 39% of investors predict re-evaluation of ESG approach due to recent geopolitical developments.
• Four in five investors concerned that inflation and rising rates will be problematic for achieving medium-term investment objectives.
• Illiquid strategies are growing in popularity with 46% of investors expecting to increase exposure to infrastructure in the next year.
• Majority of Hedge Fund and Alternative Risk Premia investors are satisfied with manager performance through recent turbulence, versus just one in four emerging market debt investors.

A new snap poll from independent investment consultancy, bfinance, on institutional investors’ responses to pressing macroeconomic and geopolitical developments has revealed widespread re-evaluation of ESG strategies and asset class exposures. Some 418 institutional investors (pension funds, insurers and others) from 39 different countries contributed to the What Are Investors Thinking Now? study.

The results show that nearly half of investors had direct exposure to Russia before Q1, of which 45% have either fully exited or are in the process of doing so, obstructed in many cases by illiquidity and lock-ups. Meanwhile, 39% of investors—including 41% of pension funds—said that said recent geopolitical developments will lead or have already led to a re-evaluation of their ESG approach, either internally or via the changing practices of their external asset managers. Furthermore, four in five investors expressed concern that inflation and rising rates would impair their ability to achieve medium-term investment objectives and 41% expect to increase the inflation sensitivity of their portfolios this year. As such, the poll showed a corresponding shift in asset allocation, with real assets receiving particular attention: 46% of investors expect to increase exposure to infrastructure in the next 12 months.

Following a dramatic and sobering first quarter of 2022, many institutional investors are grappling with pressing macroeconomic and geopolitical developments and must also now scrutinise how their portfolios have weathered significant market declines. Run between 29th March and 4th April, this snap poll is an effort to provide additional clarity on the views of the investor community at this challenging time.

Russia

While 52% of investors had no direct exposure to Russia heading into Q1, nearly half of investors had direct exposure to Russia. During Q1, 45% of investors with direct exposure to Russia either fully exited (10%) or are in the process of doing so (35%), the latter of which has been caused by obstructions to illiquidity and lock-ups.

Manager performance

Alternative Risk Premia (ARP) and Hedge Fund managers delivered high satisfaction ratings in Q1, with 51% and 57% respectively. However, investors showed the lowest satisfaction with the performance of asset managers in Emerging Market equity and debt (23% and 24% satisfied).

ESG

39% of investors said that recent geopolitical developments will lead or have already led to adjustment of their ESG approach, either in-house or via changes made by their external asset manager partners. Several others also cited that while the conflict had not itself affected their processes, it reinforced the need for a sophisticated ESG approach. Furthermore, emerging market country exposures, controversial weapons and fossil fuel firms are coming under particular scrutiny.

Inflation and rates

With four in five investors expressing concern that inflation and rising rates would impair their ability to achieve medium-term investment objectives, 41% of investors expect to increase the inflation sensitivity of their portfolio in 2022. 14% of investors are “very concerned” about the impact of inflation and rising rates on their ability to achieve medium-term investment objectives; 68% are “moderately concerned”.

Asset allocation

Macroeconomic conditions are boosting allocations to illiquid strategies, with real assets leading the way. 46% of investors expect to increase exposure to infrastructure in the next 12 months vs. 31% in the last 12 months. Strong momentum is also evident for surging Private Debt and Real Estate allocations, with 27% of investors increasing exposure to equities in the past year while 22% plan to do so. Other allocations on the rise include Private Equity, Hedge Funds and Agriculture/Forestry.

This snap poll surveyed 418 investors across 39 countries, including 162 pension funds and 82 insurers, and is a precursor to bfinance’s upcoming biennial Asset Owner Survey, launching later in 2022.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “We are very grateful indeed to the senior investors who contributed their insights a few days ago for this report. To some extent, the asset allocation changes we are seeing here represent a continuation of some longer-term shifts, such as the shift in favour of illiquid strategies and real assets. Yet investors’ concerns about inflation and rising rates—which come through in these statistics—are giving greater impetus to these trends. It is particularly interesting to see the large minority of respondents for whom geopolitical developments are prompting a change in ESG approach. This has chiefly been focused on topics such as weapons manufacturers, energy companies and country exclusions. Even among those that indicated that the conflict would not affected their ESG approach, many said that it had illustrated the importance of having a robust approach here. Indeed, we saw cases where ESG-oriented investors had significantly reduced or eliminated Russia exposure ahead of 2022, which benefited performance in Q1.”

Frithjof van Zyp, Senior Director, Client Consulting in Australia at bfinance, said: “The views of institutional investors in Australia that responded to the bfinance snap poll are very much in line with their global counterparts with nearly half of Australian institutional investors having some direct exposure to Russia. Of those, 55% are still trying to exit due to illiquidity and lock-ups. Less than 30% of Australian respondents said that recent geopolitical events will lead (or have already led) to adjustment of their ESG approach, which is slightly below the 40% figure across respondents globally.

Infrastructure and Private Debt were both flagged by Australian institutional investors as assets classes where they expect to increase allocations as a percentage of portfolio assets during the next 12 months. This is perhaps not too surprising given the defensive nature and natural inflation hedge characteristics that are available with these asset classes. However, caution will be required when choosing infrastructure strategies since not all are created equal as an inflation hedge.”

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Kathryn Saklatvala

A new study from bfinance, the independent investment consultancy, has revealed that institutional asset management fees have fallen significantly in a number of asset classes – particularly certain ESG or Impact strategy types. Pricing compression is evident in well-established strategies such as ESG Equities and Renewable Energy Infrastructure. Meanwhile, newer strategy types such as Impact Equities and ‘Article 9’ funds are offering substantial discounts versus rack rates.

This biennial survey reviews a range of asset classes and strategies, identifying notable fee reductions in certain strategy types and sub-sectors.

The study’s key findings include a reduction in the cost of active global Equity strategies with ESG requirements, where the median fee for a EUR100 million mandate has decreased by 14% since 2016. More managers have entered the space through a period of ‘ESG mainstreaming’, resulting in heightened competition for assets and a refinement in pricing. Although very new manager research suggests that there could be a modest premium for Impact and Article 9 Equity strategies, managers in these more nascent sectors are more likely to offer substantial up-front discounts even before negotiation, as they seek to build up assets.

Elsewhere in the ESG-related landscape, management fees for Renewable Energy Infrastructure (“Renewables”) strategies have fallen by 8% since 2016 and performance fees have also declined—through a period when fees for Infrastructure strategies and Private Markets strategies more broadly have remained remarkably resilient.

When looking at other strategy types, US High Yield saw median fees decrease by 15% since 2017, while fees for blended Emerging Market Debt strategies decrease by 10% in the same period. Multi-Sector Fixed Income also saw its median fee decrease by 15% since 2017.

Fund of Hedge Fund fees declined very substantially, falling by 42% between 2010 and 2019, but this decline now appears to have stopped. While fees for Private Markets strategies have remained relatively resilient, a closer look at fee models does reveal some helpful changes: Direct Lending fees, for example, are now almost universally charged on invested capital only rather than on both invested and committed capital.

The price of ESG and impact

The research from bfinance finds that investors today can benefit from a notable erosion in fee levels for a number of ESG and impact-oriented strategies. Some ESG-related sectors are now becoming relatively mature, often characterised in pricing terms by narrower dispersion in fee quotes and more clustering around certain fee-points as well as overall price compression.

Active global equity managers that integrate ESG considerations are now quoting significantly lower fees to prospective clients than five years ago. The median fee quoted by managers on EUR100 million mandates has declined by 14% since 2016, from 57bps to 50bps.

The study found that the rapid reduction in the number of active global equity strategies that do not integrate ESG considerations has negated any potential ESG pricing premium in this asset class.

Dedicated thematic and impact equity strategies

There are some interesting patterns in pricing of Impact and Thematic equity strategies that investors may consider as they explore these emergent sectors and negotiate fees. For example, recent search activity in this space (Q4 2021) suggests that there may be an on-paper premium on the pricing of Article 9 strategies, with a slightly higher median and a significantly higher upper quartile fee than we observed in Article 8 strategies.

However, this area also featured some of the most aggressive discounting against those quotes, with nearly 30% of the managers proposing Article 9 strategies offering an upfront discount (i.e. discount provided alongside quoted fee in first proposal). These upfront discounts are primarily available from managers whose pricing sits above the median. In these cases, managers are often seeking seed investors and competing to gain a foothold in this growing space.

There may also be a modest premium (or at least a higher median quoted fee) for Impact strategies, which explicitly target and are equipped to report on social and environmental outcomes. ‘ESG thematic’ strategies that do not meet the threshold which we would consider appropriate for an Impact strategy were, on average, a little cheaper in terms of quoted fees.

Renewable energy infrastructure

As the Renewable Energy Infrastructure sector has matured and developed, investors have benefitted from some significant fee reductions—contrasting with stable infrastructure pricing in other sectors.

The research found a modest reduction in quoted base fees for global Renewable Energy Infrastructure strategies, with the median quoted fee for a USD50 million mandate down 10bps versus 2016 (-8%) and a fall of 21bps in the upper quartile (-14%). The survey also saw significantly less dispersion in the fees being quoted by managers—a pattern that is characteristic of a maturing sector, where price discovery over time leads to a greater awareness of what competitors are likely to charge for similar products and a reduction in the more extreme quotes.

Importantly, performance fees and hurdle rates have also fallen. While many managers are at the 20% mark on carry, we do see an increasing proportion willing to price between 10% and 15%. In addition, the median hurdle rate has declined to 6% from 7%. There is a positive correlation (albeit a weak one) between base fees and performance fees being quoted by managers: strategies with higher base fees tend, on average, to have larger performance fees as well.

The decline in fees has been accompanied by a fall in target returns, as well as a rise in the proportion of longer-term vehicles versus ten-year private equity-type fund models. The median net IRR being targeted by funds raising capital in 2021 was 8%, down from 9% five years before).

Impact real estate

The fee quotes in Impact real estate are extremely diverse, reflecting the range of strategies that straddle Core to Value-Add profiles, though the study saw some base fee clustering around the 100bps and 65bps levels. Core strategies tend to be cheaper with no performance fees, while all Value-Add strategies have some form of a performance fee. For some managers, the performance fee relates to both financial and impact objectives, while for others it is purely financially focused.

Return targets are also very diverse and are not particularly strongly correlated with quoted fee levels. Managers in this sector seem unsure about how to price, and investors are unsure about what return expectations are appropriate and realistic. Some investors may have reputational concerns about targeting relatively high returns for an asset class that is, fundamentally, involved in the lives of vulnerable population groups. This diversity can, however, be helpful for investors that are keen to ensure that they do not overpay. The large number of start-up funds in the space and the low transparency around pricing can give well-informed clients a strong hand in negotiations.

Identifying potential fee savings

Comparison of existing fee levels against those available in a broad strategy area (e.g. “global equities”) can be useful as part of a fee review process. However, it may also be beneficial to seek a more detailed view and examine specific peer groups based on their structure, geography, strategy subtype and more.

Looking closer at structure

Example: US high yield in a UCITS structure

When we look at the period 2017–2020, we see some of the strongest pricing reductions in US High Yield strategies offered in a UCITS structure. In 2017 there were fewer offerings in this area. Managers have subsequently prioritised the diversification of their client base, with UCITS funds allowing easier flows of capital from European investors. Firms are now more firmly committed to this dimension of their businesses. With this maturation and expansion in providers we see that median fees fell by 8bps over a three-year period (-15%) and the upper quartile declined by 10bps (-17%).

Example: multi-strategy hedge funds via ‘platform’, ‘non-platform’ and ‘FoHF’

Demand for ‘multi-strategy’ among bfinance clients has risen dramatically—30-40% of new hedge fund searches launched on behalf of bfinance clients in the 12 months to September 30, 2021, were multi-strategy mandates.

Alongside conventional FoHFs, with their double layer of fees, we see so-called ‘platform’ multi-strategy approaches (in which the manager actively controls exposures to sub-strategies) and ‘non-platform’ multi-strategy approaches (in which the investor has exposure to a range of strategies at one manager but without the same degree of active selection/management of exposures). Total Expense Ratios for multi-manager platform structures can add up to nearly 5% depending on the fee pass-through. Non-platform approaches, on the other hand, can end up being significantly cheaper.

Looking closer at: strategy sub-type

Example: Blended emerging market debt

The median fee has declined from 50bps to 45bps in a three-year period (-10%), while the upper end of the range has dropped from 80bps to 67bps giving a considerably narrower range of quotes—typical of a maturing segment that has passed the price discovery phase. This decline is perhaps particularly notable when we consider that there is no passive equivalent to Blended Emerging Market Debt creating fee pressure from below: the active management of Hard Currency versus Local Currency assets is central to the strategy.

Example: Multi-sector fixed income

The past four years have brought particularly significant movement in the pricing of multi-sector fixed income strategies. These feature a range of sub[1]types—some relatively conservative, others with a more high-yield orientation (see the recently published paper Multi-Sector Fixed Income: Back in Focus). As shown in Figure 8, median fees for ‘absolute return fixed income’ (a more conservative type) have declined from 48bps to 41bps (-15%), while the fee at the lower quartile has dropped from 40bps to 33bps (-18%).

Example: US vs. European direct lending

We have seen no evident downward trend in Direct Lending fees since 2017, reflecting a significant increase in demand for this asset class and the reduction in the number of managers. However, Europe still shows a wider dispersion of base fee offerings, which can be seen as somewhat characteristic of a less mature market: although the median fee quoted for an unlevered European direct lending strategy is very similar to that quoted for a US direct lending fund, the upper quartile is more than 20bps higher. In both markets, base fees are now almost universally charged only on invested capital (rather than on both invested and committed capital), helping investors to improve cost efficiency in this asset class.

Fee comparisons are complicated by the combination of leveraged and unleveraged fund offerings and the lack of standardisation in terms of the way that managers calculate performance fees. Nearly all managers seek to charge a performance fee, but hurdle rates range from 4% to 8% and performance fees range from 10% to 20%. Leveraged strategies typically reflect higher target returns with a higher hurdle rate, although the increase in hurdle may not always be sufficient to reflect the impact of the leverage. Comparing total fee leakage between different offerings requires a scenario-based approach: a ‘league table’ of managers sorted by cost ratio can reorder as the assumption about gross return changes.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “The fourth instalment of our investment manager fees series once again puts fee reductions in focus while honing in on some specific asset classes. In the light of investors’ growing interest in ESG and impact strategies, it is particularly interesting to see some very significant reductions in the fees that managers are quoting for clients. We will be keenly watching how pricing evolves for some of the more nascent sectors, such as Article 9 funds and Impact Real Estate, where there is more uncertainty around what an appropriate fee should look like.”

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Kathryn Saklatvala

A new survey from bfinance, the independent investment consultancy, has identified significant changes in wealth managers’ investment capabilities and practices. Firms are innovating to as they fight to maintain market share and profitability in an era of fee compression and new tech-based competition.

The Wealth Manager Investment Survey gathered data from 120 wealth managers in 29 countries across five continents. Major developments are divided into three key areas: expanding investment capabilities, the rise of ESG and impact investing, and—finally—evolution in structures, systems and service providers.

Expanding investment capabilities

Wealth Managers are expanding the range of investment strategies available to clients, particularly within alternative asset classes. More than two thirds (69 per cent) have added new asset classes for wealth clients within the last three years, with 52 per cent stating they will do in the next two years. Fully 60 per cent now provide exposure to private equity, 52 per cent use emerging market debt, 52 per cent use private credit, 48 per cent use infrastructure and a further 42 per cent provide access to hedge funds.

When looking at allocations, the majority of wealth managers have reduced the proportion of wealth client assets invested in fixed income (63%) while 66% have increased allocations to equities and 61% have increased allocations to private markets strategies. The shift towards alternatives is set to continue strongly in the next two years, with improving sentiment towards liquid alternatives such as hedge funds, but only a minority plan to increase equity exposure. The surge of passive investment is also slowing. Just 21 per cent of wealth managers expect to increase their use of passive strategies in the next two years, compared to 50 per cent in the last three years.

ESG and impact investing

When it comes to the ESG agenda, three strategic camps have emerged: those planning integration of ESG across all wealth client strategies (55 per cent), those who seek to create specific ESG offerings for those clients that seek this dimension (35 per cent) and those who have no intentions in the space (10 per cent).

With this, four in five (80 per cent) wealth managers now integrate ESG considerations as part of their offering, up from 37 per cent three years ago (a 116 per cent increase). Half of wealth managers also integrate impact considerations, up from 18 per cent three years ago (a 177 per cent increase), while a third (33 per cent) state they are actively considering doing so – showing that the impact theme is moving rapidly up the priority list both in terms of demand and delivery.

However, ESG integration still only applies to the minority of wealth client assets. Only 13 per cent of those who do integrate ESG say this applies to ‘all’ of their wealth assets, while 27 per cent say it covers the ‘majority’.

Structures and service providers

The study found that wealth managers are planning to digitalise their capabilities and are looking to new technologies to develop their offering further. 87 per cent of wealth managers have added new technologies for clients to use within the last three years, with 90 per cent suggesting they will in the next two years.

Cost efficiency is high on the priority list, with many respondents citing fee compression: 46 per cent say that charges to wealth clients for the same or similar services have decreased in the last three years, with just nine per cent suggesting they have increased. Wealth managers are seeking to defend fee levels, in part through the introduction of new investment strategies described above, but are also seeking ways to save money.

In this regard, 57 per cent of wealth managers state that fees paid to external fund managers have fallen, as a percentage of assets outsourced to external fund managers, with only 9 per cent noting rise. The study also identifies a trend in favour of outsourcing more investment management to external asset managers—a shift which can help to support improved cost efficiency as well as adding differentiated investment capability

There is also a modest trend towards managing assets in collective vehicles. 34 per cent (including half of firms with more than $5 billion in wealth assets) have a higher proportion of assets in collective vehicles than they did 3 years ago, while only 14 per cent have less.

Kathryn Saklatvala, Senior Director and Head of Investment Content at bfinance, said: “It’s fantastic to see the breadth of investment capability that many wealth managers are now able to offer to clients—the results of this survey show a significantly higher usage of strategies such as private equity, infrastructure, private credit and hedge funds than we’ve seen in other studies, and far more widespread integration of ESG factors into investment. These capabilities have clearly evolved a great deal in recent years, supported by the development of in-house teams and the growing use of external asset managers.

Wealth managers are under real pressure to create high-value, differentiated product offerings as well as find new scale-driven efficiencies that can support profitability— the market is increasingly competitive, and this report highlights significant downward movement in fees. Perhaps the most widespread current trend among wealth managers is the introduction of new technologies: we are watching with interest to see whether digitisation can help to deliver the magic combination of scalability and true personalisation that many of these firms seek to achieve.”

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Kathryn Saklatvala

With investors focusing more on ESG Kathryn Saklatvala investment matters than ever before, a new global study from bfinance, including 26 respondents from Australia, tracks key changes in implementation practices and identifies today’s key challenges.

Three key themes have emerged from the findings: First, ESG is increasingly becoming a total-portfolio subject, with investors seeking to approach the key issues in a way that encompasses all asset classes. Second, ‘impact’ is rising up the agenda as the community moves towards thinking about ESG in terms of outcomes. Third, significant obstacles remain, particularly with respect to data – 84% of investors say that the lack of consistent, standardised ESG information across all asset classes and asset managers represents a challenge. The onus is now on policy-makers to deliver clearer, globally co-ordinated action.

Investors’ priorities are changing

Far from distracting attention from the ESG agenda, COVID-19 has driven ESG higher on the priority list during the past year. Indeed, one in three investors say that the pandemic has actually resulted in greater attention for ESG matters at their institution, particularly in relation to social and corporate governance matters including diversity. In total, 46% of asset owners globally say that ESG considerations are now of “high importance” to their investment approach while 39% say they’re of “moderate importance” – a cumulative total of 85%. European investors still prioritise the subject more than their global counterparts, with only 30% of US respondents saying that ESG issues are of “minor” or “no” importance. This compares with 4% of Australian respondents that say ESG issues are of “minor” or “no” importance.

Two key priorities have risen up the agenda dramatically in recent years: measuring carbon emissions and assessing ‘impact’ in areas beyond carbon emissions. 46% of global investors now assess the carbon emissions associated with their overall portfolio, up from 13% three years ago, with a further third “actively considering” this step. 28% now map the portfolio against the UN Sustainable Development Goals, up from 3% three years ago, including 36% of pension funds while a further 38% are “actively considering” this point.

While priorities and objectives are evolving, major challenges remain, with the data question chief among them. 84% of investors are experiencing challenges in obtaining consistent ESG reporting across asset managers and classes, with 55% calling this a “major challenge.” Investors are also finding difficulties in validating the investment case for ESG or impact investing and more than 50% experience difficulties in finding external asset managers that align well with their ESG approach.

Portfolios – ESG trends increasingly consistent across asset classes

As ESG becomes an ‘all-portfolio’ issue, the findings show large proportions of investors integrate relevant factors into asset classes where they were formerly not mainstream, including 67% of Private Debt portfolios, 55% of Emerging Market Debt portfolios and 76% of Private Equity portfolios.

Survey responses show asset owners are using an increasingly broad mix of approaches including ESG Integration, Negative Screening, Active Engagement via asset managers, Active Engagement directly with investee companies, Impact Investing, Thematic Investing and more. There has been substantial growth in the prevalence of all of these practices within specific asset classes over the last three years. In fixed income, for example, ESG Integration has risen from 29% three years ago to 64% while negative screening has risen from 29% to 53%. Impact investment and thematic investment are still used by a minority of investors in each asset class, but their popularity has risen dramatically in the last three years: 35% of real assets investors now do thematic ESG investing, up from 15% three years ago, with a further 20% “actively considering” doing so.

Investors have widely differing beliefs about the connection between ESG and performance, with 82% expecting ESG equities to outperform over the next three years (35% “strongly agree”) versus 70% (17%) expecting the same in bonds. These expectations become substantially firmer over a 20-year horizon.

Providers – ESG matters driving manager selection

More than 90% of investors say that ESG criteria is important to them when selecting external asset managers (60% “strongly agree”), while 42% have fired at least one asset manager where ESG matters were a contributing factor to that termination (19% “the primary/major factor”).

Investors also demanding more from their service providers, with 76% saying they have “stricter” ESG criteria for manager selection than they did three years ago. Although asset owner respondents emphasise that manager ESG assessment should not be a “box-ticking exercise”, an increasingly large proportion say they are “unlikely” to hire managers with certain ESG characteristics, such as not being a signatory of PRI (63% “unlikely to hire” in equities, 43% in real assets), not having a dedicated ESG headcount (43% in fixed income), or lacking gender/ethnic diversity (31% of investors in hedge funds “unlikely to hire”).

Daniele Goldberg, Director of Client Consulting for bfinance in Australia, comments: “ESG is clearly a focus for Australian investors with 96% of Australian respondents agreeing that ESG consideration are of high or moderate importance to their investment strategy.

“There’s long been a concern that the focus on ESG would be impacted by a market downturn. But the recent pandemic has shown this to be the opposite. In Australia, Covid-19 has clearly accelerated the focus on ESG with over 45% of Australian investors saying the pandemic has affected their investment team’s focus on ESG issues.

Kathryn Saklatvala, Head of Investment Content for bfinance, comments: “It is a privilege to be able to share insights from such a wide range of asset owners around the globe on this crucial and timely subject. The results show the increasing breadth, depth and complexity of ESG implementation as investors look to take a more consistent, portfolio-wide, data-grounded and in many cases impact-minded approach. Yet the advancement also brings challenges: investors with increasingly clear objectives and priorities in this space are even more frustrated by the lack of clear, consistent, standardised data on many of the key issues.

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Kathryn Saklatvala

Following the quickest equity market drawdown in history in Q1 2020 and with government deficits skyrocketing to formerly inconceivable levels, bfinance has conducted its mid-year Asset Owner Survey to ascertain what investors have learned from 2020 so far, how they have handled the obstacles and opportunities created by the crisis, and their current expectations.

bfinance received responses from 368 investors, just over half of which are pension funds, with combined assets of approximately US$11 trillion. The results presented a picture of cautious optimism with the vast majority (82%) being satisfied with how their portfolios have performed and widespread positive feedback for active management results, although 50% of those with explicit liabilities (including 63% of relevant pension funds) say that their ALM position has worsened this year. More than a third are making changes to risk management as a result of COVID-19 lessons, while 24% are changing their Strategic Asset Allocation in 2020. These are the key findings of the latest asset owners survey from bfinance “Managing through uncertainty”.

2020 so far

Although the vast majority of investors are satisfied with the performance of their risk management processes, bfinance found that 35% are making changes here. Similarly, 82% are satisfied with overall portfolio performance, with just 25% changing their Strategic Asset Allocation in 2020, and most are happy with the results of actively managed strategies across the majority of asset classes. That being said, there are notable problem areas: 53% of Emerging Market Debt investors, 48% of Hedge Fund investors and 64% of Alternative Risk Premia investors are dissatisfied with the performance of their asset managers (whether external or in-house) in those strategies.

bfinance noted slightly higher levels of satisfaction within asset classes from investors where only internal teams were used to manage the asset class versus cases where investment was conducted solely through external managers, although there is no evidence that the former outperformed the latter. Most investors use external managers for the majority of strategies, and 19% of investors are axing managers based on recent results with substantially more (35%) likely to do so.

Illiquid asset classes scored relatively high levels of satisfaction, albeit with considerable uncertainty given the opacity on true portfolio valuations. While two thirds of the relevant investors are “happy to use the valuation estimates provided by [their] usual channels”, 24% of investors use a Public Markets Equivalent for modelling the potential valuation changes in their portfolios and 10% are marking down estimated valuations more severely than their asset managers.

COVID-19 obstacles and opportunities

bfinance found 33% of investors have already invested in distressed or opportunistic strategies that explicitly seek to benefit from the COVID-19 fallout, while a further 22% who have not yet done so are interested in pursuing such opportunities in the coming months. Only 13% of investors say that the inability to travel and do face-to-face meetings or on-site visits poses a “major obstacle” to selecting new mangers and investments, while 31% say it presents “no obstacle”.

Among the half of investors who are taking a tactical view on risk asset exposures right now, respondents are split 3:2 in favour of underweighting risk assets versus overweighting them. North American investors are somewhat more likely to be overweight in risk assets and substantially less likely to be underweight in risk assets than the international average (23% vs 19% and 21% vs 29%).

Pre-COVID trends broadly continue, except for fixed income

The pre-COVID three-year period largely saw a continuation of trends that were initiated in the post-GFC window phase, such as a shift towards illiquid strategies, broader geographical diversification (including emerging markets), and the shift towards private market strategies. To a lesser extent, the period had also featured a shift away from equities, but no definitive swing in fixed income exposure.

bfinance’s survey suggests that, at a high level, the portfolio changes anticipated through 2020 represent a continuation of the above shifts: more exposure to private markets; lower exposure to public equities. Yet there are some differences, including a swing away from fixed income (23% of investors reducing exposure vs. 12% increasing), most notably a reduction in sovereign debt exposure.

Kathryn Saklatvala, Head of Investment Content for bfinance, comments: “The first half of 2020 has been extremely challenging for investors of all types, and undoubtedly there is more volatility and upheaval in store as the true nature of the economic impact of COVID-19 becomes clearer.

“While such periods are uncomfortable, they are also crucially informative for investors seeking to understand the diversification and resilience of portfolios, the discipline and skill of asset managers, and the weak-points in risk management capabilities or processes.

“It is great to see the majority of investors reporting satisfaction with overall portfolio performance, risk management and active management results across the majority of asset classes, although there are important changes underway on all fronts.”

Frithjof van Zyp, Australian Senior Director for bfinance, added: “We were pleased to receive responses from 34 Australian investors in the asset owner survey, the majority of whom were superannuation funds, as well as some insurance companies and endowment trusts.

“It’s interesting to note that Australia is broadly falling in line with global investment trends, particularly in terms of ESG, where 82% of Australian respondents indicated that ESG considerations are either very important or moderately important to setting investment strategy and implementation, compared to 78% of global respondents.

“There were some interesting differences when comparing the results of Australian respondents against their Global peers. For example, 41% of superfund respondents in Australia have been dissatisfied with the performance of their direct property portfolios relative to stated benchmarks and targets, whereas this figure is noticeably lower for global respondents with just 23% being quite/very dissatisfied.

“As far as positioning portfolios going forward, 11% of Australian respondents indicated being overweight risk assets, while 46% are not taking a tactical view of risk assets (i.e. rebalanced to usual weights), and 43% are underweight risk assets. Comparing these results to the Global investor responses, Australian investors seem to be slightly more cautious as the Global figures are 19% overweight risk assets, 52% not taking a tactical view, and only 29% are underweight risk assets.

“It’s also interesting to note that 37% of Superfunds indicated having either already changed their strategic/long-term asset allocation since the onset of the pandemic, or expecting to do so before the end of 2020. The response from pension funds globally sat lower at just 25%. The sudden introduction of the super early release scheme will have likely further contributed to Superfunds having to rethink their strategic asset allocations.”

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