Hard bargaining sees institutions cut mandate fees by over one quarter

Hard bargaining and encouraging competition helped institutional investors hiring managers save over one quarter on the fee levels they were initially quoted last year, according to consultants bfinance.

Savings of over 26% were possible, on average, based on the rates that managers were first quoted.

Institutional investment consultants bfinance, which studied 50 mandates, and about 1,200 price quotes from 350 fund managers in its latest survey on fees, said a typical UK institutional investor allocating £1bn could also cut fees by about 5% by limiting the number of mandates it has.

“The same investor who chooses to use several active fund managers for diversification purposes could achieve far greater cost reductions by placing investment managers in an open and transparent selection process that encourages negotiation,” bfinance said.

For the initial quotes by asset class, see below. The reduction in fees from these quotes related to both fixed and performance-related charges.

Emmanuel Léchère, head of market intelligence group at bfinance, said: “A key prerequisite for managing down fund management costs is an open, transparent negotiation process when selecting external fund managers.”

bfinance also added to the pressure on managers, evident since the credit crunch, to re-organise their fees, by level and structure.

Groups such as Amundi are changing the mix of charges on their VaR absolute return funds to increase their attraction to investors, while rivals Sothic Capital Management and fund of funds Hermes BPK allow clients to reclaim a portion of the incentive fee if their funds underperform in the longer term.

Olivier Cassin (pictured), managing director, head of research and development at bfinance said: “Performance-related fee structures are by their nature interesting, as they align the interests of investors and managers, but investors, with the help of their consultants, must systematically seek to rebalance the structure offered by the fund manager in their favour.”

The average management fee levels quoted, before negotiation, in bfinance-aided searches over the past 12 months were as follows.

For actively managed equities across market caps, the fixed fees quoted cascaded down from Latin America at 0.92%; to emerging markets (0.89%); Asia ex Japan (0.7%); global (0.6%); Eurozone/Europe (0.54%); and EAFE and US (each 0.52%).

For active small and mid-cap equity funds, the management charges first quoted ranged from 0.85% for Europe/Eurozone to 0.68% for Japan.

For active bond mandates the asset-based fees as first quoted were 0.65% for US high yield and emerging market debt; 0.63% for convertibles and about 0.24% for Eurozone investment grade credit and sovereigns.

Among alternatives the fees quoted varied from 1.2% for commodities; 1.15% for currencies; 1.07% for funds of hedge funds; 0.94% for real estate and 0.52% for asset allocation.

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