Investors in Australia and New Zealand are ahead of their global peers in reducing fees and introducing new investment strategies, a survey of asset owners has found, but the results also suggest this is because they had more fat to trim in the first place.
The 2018 Asset Owner Survey, by research and consulting firm bfinance, obtained data from 485 global investors representing about US$8 trillion ($11.1 trillion), collected in May and June this year. It found most had reduced their costs over the last three years, particularly the fees paid to managers in multiple asset classes. These savings were achieved despite portfolios becoming more complex and teams growing in size.
The 37 survey participants from Australia and New Zealand, which were mostly superannuation funds with collective assets over US$800 billion, did particularly well on the manager front. While 41 per cent of global investors managed to bring their costs down over three years, in Australia and New Zealand, the figure was 59 per cent. Also, while 51 per cent of investors worldwide brought their external manager fees down, 70 per cent in Australia and New Zealand were able to do so.
This may have been because the local investors had more room for improvement. Average total yearly costs for survey participants in Australia and New Zealand were just over 0.7 per cent of assets, which was a little higher than the global average of 0.64 per cent.
The cost reductions occurred in a range of asset classes: equities, private markets, fixed income and hedge funds. In Australia and New Zealand, 81 per cent made savings on equities, compared with 53 per cent globally, and half were paying less in private markets – as a percentage of private market assets – compared with 29 per cent globally.
Bfinance director Frithjof van Zyp said investors had renegotiated existing arrangements, consolidated portfolios into larger mandates with fewer managers, conducted external fee benchmarking studies and performed transaction cost analysis. There had also been more co-investment and, to a limited extent, insourcing.
Mandate consolidation was particularly popular in Australia and New Zealand, van Zyp said.
“This trend towards larger, fewer manager relationships is also bourne out by the findings on strategic partnerships, with more investors using asset managers for advisory services and/or giving them more flexibility in their mandates,” he said.
Mandate consolidation did not necessarily lead to a reduction in the overall number of managers used. In fact, the average investor worldwide was using more managers than three years ago.
“An investor can be adding managers, for example in new strategies, while consolidating mandates in another area,” van Zyp explained.
A third of investors in Australia and New Zealand did expect to cut their overall number of managers in the next three years, compared with 18 per cent of global respondents. But, similar to the situation with fees, this could be because the locals have more room to consolidate. The average number of managers investors in Australia and New Zealand used was 45, with a median of 40, compared with a global average of 27 and a median of 18. This comparison held true even after accounting for the larger average fund sizes in Australia and New Zealand by re-weighting the global data on manager usage, van Zyp said.
Some costs go up
The survey did show that costs went up in some areas. Staff costs rose globally, with 40 per cent of investors paying more and 23 per cent paying less (the remainder paid the same), as a percentage of assets. In Australia and New Zealand this trend was more pronounced than elsewhere, with 51 per cent spending more on staff than they were three years ago.
“New team members are not necessarily in traditional investment roles,” van Zyp said. “New approaches to ESG [environmental, social and governance investing] and significant changes to risk management…have also driven recruitment.”
Embracing private markets, smart beta
Half of the Australia and New Zealand respondents had increased their private market exposure. Also, there was a global movement towards passive equity, with 32 per cent locally, and 31 per cent worldwide, indicating they had moved in this direction in the last three years.
Australia and New Zealand respondents were leaders in looking towards smart beta; 26 per cent of them were planning to move towards it in the next 12 months, which was almost double the global figure of 14 per cent.
There was also a stronger appetite in Australia and New Zealand for alternative risk premia, which was the most popular new asset class or strategy for local investors, alongside private debt. It was in fifth place in the overall global results.