Significant gap between initial and final fund management fee structures identified in manager selection process  

Key findings include:

• Management fees globally remained stable in 2010
• Initial fee quotes by managers offered low rebates on fees for larger mandates
• Significant reductions in fees achieved through open, transparent negotiation
• Need for a rebalancing of performance management fee structures in favour of investors

London, 06 June 2011 – bfinance, an independent, privately-owned, financial services firm that provides advice to companies and institutional investors around the globe, today announces the results from its third major global fee study based on its tenders run during the last twelve months. The study encompasses 50 mandates relating to typical investments in international institutional portfolios with findings based on almost 1,200 price quotes from 350 fund management companies.

The survey showed that management fees throughout the world remained stable last year, albeit firming by a few basis points in individual cases among the more sought after asset classes, such as emerging market debt and emerging market equities. The figures shown in Table 1 outline the mean and median fees initially sought by fund management companies in the main asset classes. For actively managed equity mandates of all sizes, the highest fees continue to be charged for Latin American equities. Conversely, for externally managed funds, some of the lowest management fees were for investment grade Eurozone credit mandates, with a median of 0.23% and a mean, 0.24%.

Table1: Management fees before negotiation

The striking finding from the survey, however, was the scale of reduction in initial fee quotes to ones actually charged. The fund managers which had been shortlisted by bfinance after quantitative and qualitative analysis made significant improvements to fee structures in open competition with other managers up to the final decision.

Analysis of two case studies showing how an institutional investor can optimise their financial costs highlights the benefits of making fund managers compete in an independent process. With a reference portfolio of £1 billion and an asset allocation that is representative of UK institutional investors, the cost of fund management can be reduced by around 5% if the investor chooses to optimise its costs by limiting the number of mandates. 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. Based on fee negotiations noted on a range of asset classes in the searches carried out by bfinance, the reduction in costs exceeded 26% across the entire outsourced investment management portfolio.

Need for rebalancing of performance management fee structures

When comparing fixed management costs and structures with performance-related fees offered by fund managers, the survey found that managers appear to use highly conservative assumptions about the alpha they believe they can generate. For active European/Eurozone equity fund management, payment based on performance-related fees becomes much more advantageous for the half of fund managers who offer it once the alpha generated exceeds 1%. Surprisingly, no fund management company has a fee structure requiring it to beat a benchmark of at least 2%.

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. This comes across very clearly from this survey and forms a key part of our manager selection process at bfinance".

Commenting on performance related fees, Olivier Cassin, 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 research for the study was conducted using a sample of 50 tenders because they relate to the most typical investments in institutional portfolios. Almost 1,200 replies from 350 fund management companies were analysed. By analysing the difference between the initial fees quoted in response to fund management searches conducted by bfinance, the final fees agreed by the end of a selection process, bfinance has uncovered key information about the actual level of fees charged for different asset classes.

About bfinance

bfinance is an independent, specialist financial services consulting firm and trusted partner of its institutional investor and large corporate clients. Its Investment Consulting practice focuses on investment manager search and selection while its Corporate Banking practice offers banking relationship advisory services including the optimisation of cash management processes. Established in 1999, bfinance has over 60 employees in offices in London, Paris, Amsterdam, Munich, Milan, Montreal, Toronto and Dubai. bfinance UK Limited is authorised and regulated by the Financial Services Authority.

bfinance’s Investment Consulting Practice

bfinance’s Investment Consulting practice focuses on investment manager search and selection. bfinance offers a bespoke, client-focused service covering all asset classes to its client base spanning 20 different countries in Europe, North America and the Gulf Region. bfinance analyses the broadest possible pool of managers to identify the most suitable matches, according to each client’s specific requirements. Its dedicated research and analysis team for its Investment Consulting arm is based in London.

Further information can be found by visiting www.bfinance.com or by contacting:

JPES Partners: +44 (0)20 7002 7822 This e-mail address is being protected from spambots. You need JavaScript enabled to view it