bfinance: Higher Fees Don’t Mean Better Investment Management

Feb 9 2015 | 5:55am ET

When it comes to investment management, you don’t get what you pay for, according to recent findings from bfinance’s latest institutional investor study.

The report, which looked at fees, found that reliable alpha does not necessarily come with higher cost charges for investors but rather that consistent and outperforming managers tend to adopt a below average pricing policy. 
The key findings of this year’s study show that fees diminish significantly as assets increase. Data from mainstream active long-only asset classes indicate that fees on mandates of €400 million decrease by 15% compared to €100 million mandates.

Ian Shea, head of equities at bfinance, said: “Counter intuitively, the correlation between high quality asset management and fees is weak. The most adept managers are also those that are most inclined to be competitive on fees and inclined to work with asset owners to find creative performance fee solutions. If negotiations are managed well, it seems you can have your cake and eat it too; significant savings can be achieved.”

 Finding also show that active managers showing a genuine capability to outperform their benchmarks over time do not ask for higher fees. In fact, their price positioning is identical to that of managers less able to generate the best performance over the long term.
Also, the level of management fees quoted in the first stages of a tender procedure is not set in stone. Rebates achieved through negotiation represent on average 20% off the initially quoted price
The survey revealed that alternative methods of remuneration based on performance fees are more frequent and better aligned with the interest of investors than they used to be.
Overall, bfinance found that fee levels have remained consistent over the past three year period since bfinance last conducted this survey with the single exception of “low vol” strategies where fees have declined as investment product offerings in this asset class have proliferated. 
Emmanuel Lechere, head of the market intelligence group at bfinance, said: “The dynamics of setting management fees depends upon a host of factors that have little to do with the functioning of a competitive market, where pricing power would benefit the best managers most efficiently. It is therefore crucial to concentrate on the capacity of each manager to create value, before entering into negotiations on fees with the best managers at a later stage in the RFP process.”
In the report, bfinance analysed the responses of over 650 investment managers to more than a 100 tenders, evaluating the data of close to 3,200 responses. 

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...