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Institutional Investment Management Fees Held Steady in 2016

Total fund-level institutional investment management fees were mostly unchanged in 2016 compared to historical observations, new research suggests, running counter to the common narrative describing widespread fee compression across the industry.

Callan’s seventh installment of its Investment Management Fee Survey — marking the 30th anniversary of the original publication — finds that fund sponsors in 2016 paid a median 38 basis points in investment management fees across the total fund, unchanged compared from 2014.

The survey of institutional investors offer insights regarding the fees paid for investment management services, including total fund-level fees, performance-based fees and fee negotiation practices, as well as actual fees paid by asset owners to fund managers compared to published fee schedules at the asset class level. The 2017 survey included 59 institutional investors with $1.1 trillion of total plan assets and 279 investment managers with $13.9 trillion of total assets under management.

Perhaps not surprisingly, fund size influenced total investment management fees paid. Driven largely by economies of scale, funds with less than $1 billion in assets paid 65% more than medium funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets), according to the findings.

Corporate funds (37 bps) paid slightly more than public funds (36 bps) in 2016 and remained stable from 2014 levels. But endowments and foundations have paid the most in management fees over time: 60 bps in 2012, 55 bps in 2014, and 68 bps in 2016. The report explains that the higher fees for endowments and foundations resulted from their relatively larger allocation to alternative asset classes.

Callan notes that even though the survey did not observe a significant decrease in the overall fees paid by plan sponsors to investment managers, it found that 21% of investment managers said they plan to lower fees in 2017.

Other key findings include that 69% of fund sponsor assets are actively managed, down from 84% in 1996. The most frequently cited concern regarding fees was whether or not active managers are providing the value-add to justify the fees, the results show. Callan notes that nearly half of all respondents (49%) chose this answer.

In addition, U.S. equity and non-U.S./global equity had the most dramatic movements from 2014 to 2016, with U.S. equity dropping 4 bps at the median and non-U.S./global rising 5 bps, according to the report. Meanwhile, alternatives — including hedge funds, hedge funds-of-funds, real estate and private equity — was consistently the most expensive asset class allocation, with median fees of 90 bps, while fixed income was the cheapest at 21 bps.

Finally, the report notes that approximately the same number of fund sponsors reported paying performance-based fees for at least one account in 2016 (56%) as in 2014 (55%), on par with earlier observations. The report suggests that performance-based fees are becoming less popular among investment managers, with the findings showing that the percentage of investment management firms that offered performance-based fees dropping the most since the question was asked in the survey, to 64% in 2016 from 75% in 2014. Callan further notes, however, that the use of these fee arrangements increased over the last two years, with 21% of managers’ clients paying performance-based fees in 2016, up from 17% in 2014.

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