Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Funds fret ‘high and hidden’ private market fees
Just 16 per cent of the 197 of institutional investors in a snap bfinance survey are satisfied with the transparency and comparability of costs in private markets, with respondents complaining that high and “hidden” fees continue to be an issue.
“Some real estate funds and infrastructure funds have a habit of charging various types of one-off costs to the fund (mostly in relation to acquisitions and/or failed acquisitions) that are hard to predict,” one respondent said. “Comparability is hampered as not all funds are equally eager to stuff costs into this category.”
There are still too many deal fees in private markets for some of the institutions surveyed, while liquid alternatives also saw a high degree of dissatisfaction (only 18 per cent satisfied) with one respondent saying that “too much information is hidden with hedge funds and certain alternatives”.
But cost-additive pressures are emerging across all asset classes, even where underlying costs should be falling i.e. trading with improved automation where savings aren’t always being passed through.
And routine fund servicing costs – custody, audit and legal – have also increased for around 34 per cent of respondents, while 21 per cent reported an increase in ‘ad hoc’ expenses from managers and others are seeing higher market impact costs following a period of market volatility and periodic fixed income liquidity constraints.
Nearly half of respondents were dissatisfied with the level of comparability of manager performance fees and market impact costs while 37 per cent were dissatisfied with the comparability of management fees.
“Although we’ve seen some investors making major strides on the subject of cost management, this report really illustrates how far the investment industry still has to go before it reaches high standards of ‘cost transparency’ and ‘cost comparability’ in the eyes of asset owners,” said Duncan Higgs, bfinance managing director and head of portfolio solutions.
“This subject will likely come under greater scrutiny now that costs in many areas are rising – particularly in fees for fund servicing (custody, audit, legal) and various ad hoc charges passed on by asset managers to their clients outside of the management fees. We still see real scope for investors to improve value for money, without compromising on strategic goals, in areas such as transaction cost analysis.”
A significant cost pressure for institutions has been the proliferation of ESG services. ESG data providers and advisers come with “significant” price tags, while one respondent complained that managers were wanting to charge for ESG despite claiming it was “embedded”.
“We have not observed meaningful changes in management fees and other costs for mainstream asset classes, even though our expectations for reporting, particularly with respect to ESG/climate and stewardship reporting, have increased,” one respondent said. “One potential implication of this is a bias towards very large investment management firms which are better able to absorb the costs of meeting more stringent reporting requirements.”
