The pressure to lower fees on traditional active management has been unrelenting, according to an industry analysis of fee levels and trends across multiple asset classes and mandate sizes.
Callan’s 2019 Investment Management Fee Study finds that 98% of total fees paid went to active managers, while 70% of assets were managed actively. Fees were also concentrated, according to the findings, which show that 50% of total fees went to less than 10% of management firms.
Using the firm’s proprietary investment manager and client performance reporting databases, as well as actual client fee schedules, the study provides insight into what institutional investors are actually paying (negotiated fees) versus investment managers’ published fee schedules. It reflects trends on 2018 fees representing more than $500 billion in AUM and $1.8 billion in total fees paid. The firm’s fee database includes more than 350 investment firms and more than 165 institutional investors.
New for the 2019 study is a comparison to the published fees for only the products in each asset class that have client mandates, as well as a vintage analysisof actual fees by year of hiring date.
“Investment management fees have been a dominant issue post-Global Financial Crisis and the pressure to lower fees on traditional active management has been relentless,” notes Ivan “Butch” Cliff, Callan’s Executive Vice President and Director of Research. “Coupled with smaller average mandate sizes and movement toward more private markets investments, traditional active investment manager fees have declined meaningfully.”
To that end, the study observes that fee pressures are high across all segments of active U.S. equity as flows out of this area and into both passive and private markets continue. “Even where average fees in basis points appear similar to the past, these fees are being offered on significantly smaller mandates, thereby resulting in much smaller dollar fees per mandate,” the study notes.
Active management market share in the U.S. large cap and all cap equity segment is now only 39% of assets versus 61% for passive, but total assets are still large at $54.9 billion, Callan notes. The weighted average fee is now 40 basis points and $784,000 per mandate. Amid the fee pressures, average mandate sizes have also dropped 25% since the global financial crisis, resulting in a 35% drop in average dollar fee per mandate. “For very large mandates, fees can go well below 30 bps, reflecting the growing adoption of lower-fee quantitative-based strategies,” the study explains.
Passive fees as a group also continue to “grind downwards” and are now shown to 1/10th of a basis point. Callan notes that market share is dominated by four to five players and pricing can be dependent on securities lending. Average mandate sizes and dollar fees are also dropping as smaller funds are using passive. Passive management in aggregate controls about 30% of institutional market assets and 2% of the total management fees.
Meanwhile, the highest fees paid included hedge funds-of-funds at 112 basis points, followed by private real estate (85 bps) and non-U.S./global small cap (71 bps). Passively managed U.S. large cap/all cap had the lowest fees at 2 basis points, followed by core fixed income (3 bps), U.S. mid/small/micro-cap equity (4 bps) and non-U.S./global equity (5 bps).
Callan’s study further notes that pricing power was strongest for private real estate and non-U.S. equity products.
