Fee levels and the true capabilities of product providers are key concerns as investment banks, funds managers and custodians wrestle for market share as the domestic institutional investment industry grows, the 2008 Investment Administration Conference heard.
Singling out funds managers, Jack Gray, formerly a strategist with GMO, said during an afternoon panel session that service providers to superannuation funds dictated the prices at which these products were sold. “There is no real downward pressure on fees towards the marginal cost of production,” Gray said. “The funds don’t have the power.”
He experienced this imbalance first-hand while chief investment officer with AMP, prior to his work with GMO. “I had no way of bargaining down the price.” An example of this is the inappropriate ‘commitment’ fee charged by some private equity managers, he said. Borrowing a comment from Jeremy Grantham, chief executive of GMO, Gray observed that “per unit of talent, this industry is the most overpaid in the world”.
Andrew Fay, head of Deutsche Asset Management’s Asia-Pacific business, said that base fees were more likely to decline than performance fees, since the latter charge spurred managers on to better performance. He also said the separation of alpha and beta and the emergence of master manager custody were the dominant themes shaping the practices of institutional investment.
Among the services offered through master manager custody are the implementation of alpha and beta mandates, emulation funds and methods of minimising capital gains tax on returns, such as ‘propagation’.
Laurence Bailey, chief executive of JPMorgan Worldwide Securities Services Asia Pacific, said that despite the creation of these new tools, custodians were “in a catch-up mode rather than an innovative mode”. Although custodians had developed better methods of mitigating risk and enhancing investment returns, they needed to better equip themselves to accommodate alternative investment transactions, such as those conducted by private equity vehicles and hedge funds, Bailey said.
The valuation of illiquid investments was an immediate problem area. However the expanded range of services offered by custodians meant they had “moved from providing plumbing to broader infrastructure for the industry.” Jonathan Green, senior manager of investment facilities with TCorp, said that investors were more interested in the capabilities of service providers, rather than the new products being built. “Investors will now focus on capability and not product. There’s a big difference between the two,” Green says.
While custodians are capable of “unlocking dormant value,” the master manager concept seems to have been introduced as a product instead of a capability, he said. Super funds’ engagement with investment banks was also discussed by the panel. Fay said that asset managers would eventually offer structured products, partnering with investment banks to access the balance sheet capital required.
In this, managers’ fiduciary duties would be called on to moderate the money-making focus of investment banks. Such a relationship would give investment banks an opportunity to carve out a wider niche in the retirement savings market, Green added.
Gray also addressed super funds’ development of internal investment management divisions. “This would lead to a further blurring. You will find that the people managing the money will want to go after third-party business as well,” he said.