Total expenses for institutional investors have fallen 5% since 2015, according to Callan’s 2021 Cost of Doing Business Survey, marking the first decrease in the history of the survey.
Institutional investors paid an average of 54.2 basis points for total fund expenses, with the vast majority of those expenses going toward external investment management fees, which fell 4% from 2015, the firm notes. In fact, 87% of expenses went toward external investment management fees, which were down 6 percentage points from 2015 (93%).
The findings in this year’s survey reflects trends on 2020 expenses for 163 organizations representing 194 plans with more than $975 billion in assets under management (AUM), including corporate defined benefit plans, public DB plans and nonprofits. Organizations with less than $2 billion in AUM represented 70% of the respondents. Callan notes that the goal of the survey is to illustrate common practices employed by institutional investors and to empower asset owners with objective information to help manage expenses.
“Average total fund expenses for asset owners in aggregate went down for the first time in the survey’s history,” observes Ivan “Butch” Cliff, Executive Vice President and Director of Research. “This is not surprising given the ongoing compression of active management fees, along with the increased usage of passive management.” Cliff observes, however, that the aggregate results mask the major differences in fee trends across asset owner type and size.
Fee Trends
For instance, average total expenses by investor size ranged from 56.1 bps for small plans to 43.8 bps for medium plans and 53.6 bps for large plans, due to their greater usage of higher-fee alternative asset classes. By investor type, nonprofits paid the most, at 72.1 bps, due to their relatively higher allocations to alternative asset classes. Public plans paid 51.4 bps, while corporate plans paid 48.2 bps.
And while the average external investment management fee was 43.2 bps, down 1.9 bps from 2015, large plans paid the highest investment management fees, at 51.5 bps on average, again due to their relatively higher allocations to alternative asset classes. Medium-size plans paid 40 bps and small plans paid 42.5 bps. By investor type, nonprofits paid the highest average management fees, at 52.5 bps, while corporate plans paid the lowest, at 36.3 bps.
Other investment related expenses show that staff compensation jumped 23%, the largest percentage increase of any major expense category.
Custody Fees
In terms of the use of custody services, 81% of respondents employed global custody services for U.S. assets and sub-custody of non-U.S. assets, the highest share for any category. The study also found that the average fee for custody services was 3.7 bps. By investor size, the average fee ranged from 5.6 bps for small funds to 0.3 bps for large funds, which benefit from their scale and from efforts by large custodian banks to increase market share.
Regarding future changes, the survey found that 44% of respondents plan to review and/or renegotiate fees over the next one to two years as their biggest change, whether it is custody fees (27%) or investment management fees (17%).
Allocations
The survey also revealed that respondents allocated 35% of their portfolios to U.S. equity, down 6 percentage points from 2010. Nearly 60% of that allocation went to passive strategies. In terms of alternative asset classes, the share of respondents with allocations to hedge funds fell 4 percentage points from 2015, while the share with allocations to private equity and real assets (which includes private real estate, REITs, and public and private real assets) rose 1 and 3 percentage points, respectively.
Meanwhile, allocations to alternatives varied widely by investor size, with large funds (more than $10 billion AUM) allocating 25% on average, compared with 14% for medium-sized funds ($2 billion–$10 billion) and 10% for small funds (under $2 billion).
Staffing and Oversight
As for external investment managers, Callan notes that respondents had an average of 17 managers for their private equity allocations, the most of any asset class. Rounding out the top three were real assets at 12 managers and hedge funds at 8.
Additionally, large funds had on average 13 dedicated staff members (referring to employees who have few if any responsibilities beyond fund management). The study observes that this is five times the number for small funds. For all respondents, non-dedicated staff declined 44% since 2015, to 3.1 on average. And the average number of total staff has fallen 12% since 2015, to 10.
Callan notes that 38% of respondents used both a board of directors and an investment committee to handle fund oversight.
While data was collected from November 2020 to June 2021 among a broad sample of institutional fund sponsors in the U.S., responses reflect data for calendar year 2020. Callan notes that it published similar surveys in 1998, 2002, 2005, 2009, 2013 and 2016.
