A new survey of more than 260 asset owners globally revealed that Australian asset owners are among the most pessimistic about the economic outlook and that a substantial proportion of asset owners have been disappointed with their investment performance so far.

The bfinance survey, which included more than 30 Australian institutional investors, explored how funds are positioning their portfolios in the midst of the COVID-19 crisis.

We expect this will lead to considerable scrutiny of asset allocation, manager selection, and associated investment manager fees.

The focus on APRA’s members’ outcomes is a key motive for super fund trustees to review their investment management fees in a comprehensive and independent manner. Couple this with the significant investment drawdowns due to the COVID-19 crisis and there will be an even stronger incentive to secure fee savings.

The process of “validating” investment manager fees helps super fund trustees determine where they are already getting good value for money and where investment manager fees should be renegotiated.

Our experience shows that the data on fees sourced by managers during a live tender provides investors with maximum transparency for renegotiations. This ‘live data’ provides conviction that the comparators are relevant to the particular strategy and mandate while avoiding the price-inflation found in manager fee surveys.

The latest bfinance data indicates fees continue to drop.

In our conversations with Australian super funds, there is a consensus view that many investment managers operate with very healthy profit margins and there’s still room for fees to decline without excessively squeezing the managers. The prevailing opinion is that investment managers are, by and large, retaining scale benefits when assets under management increase rather than sharing these benefits with clients. Some asset owners did highlight exceptions such as managers offering loyalty bonuses (a reduction in fees based on length of time that the investor has been in the strategy).

Multiple super funds have expressed the view that certain aspects of asset manager usage could and should become more standardised.

The consolidation of Australian superannuation schemes is also potentially helpful in terms of increasing bargaining power to reduce fees.

Trustees expect strong governance on costs to continue, ideally without sacrificing the quality of investment strategy. The key to cost reduction is price competition.

Price competition is still weak relative to other sectors, due to the lack of transparency on fees and total costs, the narrow shortlists often used in manager selection and the tendency to leave fee negotiation until the final stage of a manager search process.

Since regular tenders are not always desirable, fee renegotiations can introduce an element of competition by proxy if the right information is used. Competitive forces can be maximised when the investor truly understands their value to the managers they are considering.

 

Frithjof van Zyp is a director of bfinance Australia.

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