2016 Cost of Doing Business Survey. For U.S. Funds and Trusts November 2016

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1 2016 Cost of Doing Business Survey For U.S. Funds and Trusts November 2016 James A. Callahan, CFA Executive Vice President Head of Fund Sponsor Consulting

2 Outline Executive Summary Respondent Group Profile Investment Related Expenses Compensation Staffing Oversight 1

3 Executive Summary The results incorporate responses from 90 fund sponsors representing more than $400 billion in assets. We include comparisons with similar surveys Callan conducted in the past to highlight enduring and long-term trends in fund/trust management and expenses. Our analysis suggests that external investment management, advisor (non-investment related), and custody fees continued to rise from our last conducted survey. We continue to see a trend of asset flows from traditional asset classes, like U.S. equity, into real estate, hedge funds, and private equity. 2

4 Executive Summary In 2015, asset owners spent an average of 62 basis points of total assets to operate their funds. Average total fund expenses have climbed more than 75% since 1998 External investment management fees continue to represent the lion s share of total fund expenses, representing more than 90% of total costs. This figure has grown steadily over time, from 83% in The increase can largely be attributed to growing allocations to more expensive alternative asset classes External investment management fees are the primary driver of total fund expenses. These fees have risen 29% since 2012 when the survey was last administered. Non-investment management external advisor fees, which are the second largest average expense for U.S. funds, have increased 20% since Not surprisingly, smaller funds defined as those with less than $1 billion in total assets pay a premium (78 basis points, on average) to administer their funds relative to mid-sized and larger funds. Conversely, there is little difference between total expenses for the medium (47 basis points) and large funds (48.5 basis points) that responded to our survey. This can be attributed to differences in asset allocation, as large funds tend to invest in more expensive strategies. Ancillary costs such as custody and external advisor fees including consulting services also increased more for small-sized firms as compared to their mid and large sized counterparts. 3

5 Respondent Group Profile By Fund Type By Asset Type Other 7% Endowments/ Foundations 26% Public 32% Corporate 35% 32% Non- Retirement Assets 68% Defined Benefit Note: Throughout this report, charts may not sum to 100% due to rounding. 4

6 Respondent Group Profile (continued) Respondents by Fund Size Respondents by Location Small (<$1 bn) 42% Large ($3bil- $30 bil) 27% 18% 7% 33% 35% Medium (1$-$3 bil) 31% 7% 5

7 Respondent Group Profile (continued) Survey respondents collectively had $409 billion in assets as of December 31,

8 Respondent Group Profile (continued) 1 Most respondents (91%) provided data on assets and expenses as of 12/31/2015, and the remainder provided data with alternative year-end dates (6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016) depending on full-year or calendar-year periods. 7

9 Respondent Group Profile (continued) Average Respondent Asset Allocations by Fund Size 5% 4% 7% 2% 26% 5% 14% 3% 5% 5% 5% 4% 7% 1% 7% 10% 1% 3% 6% 2% 28% 7% 25% 6% 14% 13% 2% Other Real Estate Private Equity Hedge Funds Cash Non-U.S. Fixed Income U.S. Fixed Income Global Equity 33% 26% 26% Non-U.S. Equity U.S. Equity Small (<$1 bn) Medium ($1 to $3 bn) Large (>$3 bn) 1 Most respondents (91%) provided data on assets and expenses as of 12/31/15, and the remainder provided data with alternative year-end dates (6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016) depending on full-year or calendar-year periods. 8

10 Respondent Group Profile (continued) Average Respondent Asset Allocations by Fund Type 5% 3% 2% 8% 4% 6% 5% 1% 3% 2% 2% 25% 37% 16% 7% 3% 7% 15% 13% 15% 1% 7% 5% 8% 13% 3% 1% Other Real Estate Private Equity Hedge Funds Cash Non-U.S. Fixed Income U.S. Fixed Income Global Equity 30% 30% 24% Non-U.S. Equity U.S. Equity Public Corporate Endowments/Foundations 1 Most respondents (91%) provided data on assets and expenses as of 12/31/15, and the remainder provided data with alternative year-end dates (6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016) depending on full-year or calendar-year periods. 9

11 Investment-Related Expenses Total Expenses Over Time 10

12 Investment-Related Expenses Major Expenses 2015 Average Responses 93.1% External Investment Managers 2.5% Other external advisor (consultant fees included) 1.9% Custody 1.3% 1.2% Total investment-related staff compensation (salary and bonus) Other (other investment operational and board and staff travel) 11

13 Investment-Related Expenses (continued) Expense Components Over Time Expenses relative to total fund 60 bps 50 bps 40 bps 30 bps 20 bps 10 bps 0 bps Custody External investment manager Investment-related staff compensation Non-investment management Other

14 Investment-Related Expenses (continued) 13

15 Investment-Related Expenses (continued) 14

16 Investment-Related Expenses (continued) Other includes exploring Outsourced CIO, increasing the use of passive funds, consultant reviews, and ESG screening services. 15

17 Investment-Related Expenses (continued) 16

18 Investment-Related Expenses (continued) 17

19 External Investment Managers 18

20 Investment-Related Expenses (continued) 19

21 Investment-Related Expenses (continued) 20

22 Investment-Related Expenses (continued) 21

23 Investment-Related Expenses (continued) 22

24 Investment-Related Expenses (continued) 23

25 Correlations 24

26 Investment-Related Expenses (continued) *For surveys produced prior to 2012, medium funds were defined as those with $1 to $10 billion in assets, and large funds as those with more than $10 billion. **Multiple responses were allowed. 25

27 Investment-Related Expenses (continued) *For surveys produced prior to 2012, medium funds were defined as those with $1 to $10 billion in assets, and large funds as those with more than $10 billion. **Multiple responses were allowed. 26

28 Most Frequently Cited Cost Concerns 27

29 Compensation Compensation data is primarily for public funds, excluding select and/or supervisorial roles : Executive level, 47% public, 19% corporate; Investment management, 52% public, 16% corporate; Investment Administration, 56% public, 22% corporate; benefits administration, 73% public, 13% corporate; selecting/supervising, 33% public, 44% corporate. The remaining percentages reflect responses for endowments/foundations, Taft-Hartley plans, and other fund types. 28

30 Compensation (continued) Investment management functions are the only positions that specialize in certain asset classes. Asset class specification breakdown for investment management roles: 18% equity, 22% fixed income, 45% alternatives. 29

31 Staffing 30

32 Oversight Other: a benefit plans advisory committee, Finance Committee Board of Directors, and staff with oversight from board or committee. 31

33 Oversight Board of Directors/Trustees 32

34 Oversight Investment Committee 33

35 ~End~ Corporate Headquarters 600 Montgomery Street Suite 800 San Francisco, CA Regional Offices Atlanta Chicago Denver New Jersey Callan Associates 34