2017 Investment Management Fee Survey

Transcription

1 CALLAN INSTITUTE Survey 2017 Investment Management Fee Survey U.S. Institutional Fund Sponsors and Investment Managers

2

3 Table of Contents Executive Summary 1 Key Findings 2 Respondent Group Profile 4 Total Fund-Level Fees 6 Actual Fees by Asset Class Paid Over Time 8 Fee Revenue Allocation 9 Performance-Based Fees 10 Fee Reviews and Alterations 15 Fee Negotiations and Discounts 18 Top Fee Concerns 22 Published vs. Actual Fees by Asset Class 23 Appendix 43 0

4 Executive Summary Overview and Methodology Callan s the seventh fee survey we have produced in 30 years reports on institutional investment management fee payment practices and trends. The data in this report were gleaned from electronic questionnaires sent to a broad sample of U.S.-based institutional fund sponsors and investment management organizations, as well as from information in Callan s proprietary database. Respondents provided fee information for calendar year 2016 (specific dates varied by organization, but the majority were as of December 31, 2016), and perspective on fee practices for Published and Actual Fee Distributions Methodology Published fees were collected from Callan s database of investment managers, which houses more than 1,600 strategies and for which fee data is self-reported. Published fee distributions are calculated according to the data points available for actual fees within a predetermined range per account size tier. The representative ranges of the actual fee account sizes were applied to the published fee schedules for strategies in the corresponding asset class, resulting in an apples-to-apples comparison of published and actual fees. Actual fees were collected from two sources: via the questionnaire that fund sponsor participants completed, and via Callan s database of fund sponsor clients. These two datasets were combined to create one sample for each asset class, which was then separated by account size before aggregate statistics were calculated. 1

5 Key Findings Callan s 2017 Investment Management Fee Survey reflects trends on 2016 fees for 59 U.S. funds and trusts and 279 investment management organizations. This is the 30th anniversary of the original publication. 21% of investment managers plan to lower fees in % Of fund sponsor assets actively managed, down from 84% in % Decrease in revenue allocated to bonuses for managers since 2014 Most frequently cited concern regarding fees: Whether or not active managers are providing the value-added to justify the fees 38 bps median total investment management fees paid Median investment management fees by asset class Fixed Income U.S. Equity Non-U.S./Global 21 bps 34 bps 45 bps Alternatives 90 bps 15% Decrease in the use of performancebased fees among investment managers since bps public funds 68 bps endowments/ foundations 37 bps corporate funds Increase in allocation to alternatives since 2014 public funds 17% corporate funds endowments/ foundations 17% 6% 2

6 Key Findings: Total Fund-Level Fees 38 basis points was the median fee paid across the total fund in 2016 Fund sponsors paid a median 38 basis points in investment management fees in 2016 across the total fund, unchanged relative to The range in fees paid across respondents increased from 2014 to Endowment funds paid the most, public funds paid the least Endowments/foundations have paid the most in management fees over time: 60 bps in 2012, 55 bps in 2014, and 68 bps in Corporate funds (37 bps) paid slightly more than public funds (36 bps) in 2016 and remained stable from 2014 levels.. Fund size influenced total investment management fees paid Smaller funds paid a premium for investment management relative to other fund sizes: funds with less than $1 billion in assets paid 65% more than medium funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets). 3

7 Respondent Group Profile: Fund Sponsors Fund Sponsor Respondents by Type Fund Sponsor Respondents by Assets Corporate 34% > $100bn 8% < $1bn 29% Public 44% Endowment/ Foundation 20% > $10bn to $100bn 22% $1bn to $10bn 41% Other 2% 59 Fund sponsors $1.1 trillion in total assets The majority of respondents were public funds (26), followed by corporate (20), and endowments/foundations (12). Fifty-nine asset owners representing more than $1.1 trillion in assets responded to Callan s. The fund sponsor respondent group was skewed toward larger funds when compared to the U.S. fund sponsor marketplace as a whole, as represented by Standard & Poor s Money Market Directories 2016 Database, where around 81% of funds have less than $1 billion in assets. The majority of respondent funds assets were actively managed (69% on average). While several funds managed a sizable portion of their assets internally, on average 87% of assets were managed externally. 4

8 Respondent Group Profile: Investment Managers 279 Investment manager respondents Investment Manager Respondents by Firm AUM (as of 12/31/2016) > $100 bn 14% < $1 bn 15% $13.9 trillion Total assets under management (AUM) > $30bn to $100bn 13% $1bn to $3bn 18% > $10bn to $30bn 14% > $3bn to $5bn 8% > $5bn to $10bn 18% Investment management organizations with $13.9 trillion in assets under management responded to the survey Survey results also incorporated responses from 279 investment management organizations, supplemented by Callan s Investment Manager Database of more than 1,600 firms. Respondent firms were diversified by size: 41% had $5 billion or less in AUM; 32% had between $5.1 billion and $30 billion AUM; and 27% managed more than $30 billion in assets. 5

9 Total Fund-Level Fees Investment Management Fees Across Total Fund (bps) When market values are calculated (for fee base)* 100 bps 80 bps Quarter end 42% 60 bps 40 bps Varies by manager 36% 20 bps 0 bps Month end 20% 10th percentile th percentile Median th percentile th percentile Average # of observations Quarter beginning 2% 38 bps Median investment management fees paid by fund sponsors in % Use quarter-end market values for fee calculations * Multiple responses allowed 6

10 Total Fund-Level Fees: by Fund Type and Size Median Total Investment Management Fees Paid (by fund type) 70 bps 68 bps Median investment management fees paid by Endowments/Foundations in 2016; up 24% over 2014 (55 bps) 60 bps 50 bps 40 bps Public Corporate 30 bps Endowment/Foundations 20 bps % Jump in total fees from 2014 to 2016 for the smallest funds from 52 bps to 61 bps Median Total Investment Management Fees Paid (by fund size) 70 bps 60 bps 50 bps < $1bn $1bn < $10bn 40 bps 30 bps $10bn < $50bn 20 bps

11 Actual Fees by Asset Class Paid Over Time Actual Fees by Asset Class (basis points as a percent of total asset class value) 160 bps U.S. equity and non-u.s./global equity had the most dramatic movements from 2014 to 2016, with U.S. equity dropping 4 bps at the median and non-u.s./global rising 5 bps. Fixed income and alternatives held relatively steady over the past two years at around 20 bps and 90 bps, respectively. 140 bps 120 bps 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps U.S. Equity Non-U.S./Global Equity Fixed Income Alternatives th percentile th percentile Median th percentile th percentile Average # of observations Source: Fund Sponsor questionnaire responses 8

12 Fee Revenue Allocation Allocations to Fee Revenues * 18% Investment managers allocation to bonuses as a percent of revenue in 2016, down from 24% in U.S. Large Cap Equity + + Break-even Base to Cover Costs Bonus to Manager/Team Profit Margin to Firm = Total Firm Revenue 50% 20% 30% Number of Respondents 88 The most dramatic change was seen in non- U.S. Mid Cap Equity 50% 24% 26% 55 U.S. fixed income (down 19%), followed by hedge funds and global equity (down 13%, each). U.S. Small Cap Equity Non-U.S. Equity 48% 50% 21% 15% 31% 35% The percentage of revenue allocated to Global Equity 67% 15% 19% 37 cover the cost of operations increased dramatically, from 42% to 60%, on average. Profit margin as a percentage of revenue decreased from 34% in 2014 to 22% in 2016, on average. Emerging Market Equity Core Fixed Income Core Plus Fixed Income High Yield Fixed Income 60% 53% 63% 47% 13% 23% 15% 27% 27% 24% 23% 26% Non-U.S. Fixed Income 73% 16% 12% 18 Real Estate 60% 18% 23% 21 Hedge Fund-of-Funds 76% 19% 5% 16 Commodity Funds 86% 8% 7% 20 * Average responses. 9

13 Performance-Based Fees We present average responses to questions about performance-based fee usage among both fund sponsors and investment managers. We present data collected for 2016 alongside answers to the same questions posed in the previous years Callan produced this survey. About the same number of fund sponsors reported paying performance-based fees for at least one account in 2016 (56%) as in 2014 (55%). This was on par with the 59% in The asset allocations of the respondent groups influenced this figure, as exposure to alternatives including hedge funds, hedge fund-of-funds, private equity, and real estate accounted for much of the use in performance-based fee structures. The percentage of investment management firms that offered performance-based fees dropped the most since the question was asked in our survey, to 64% in 2016 from 75% in This was more in line with historical observations (64% in 2009, and 65% in 2011). However, the use of these fee arrangements increased over the last two years: 21% of managers clients paid performance-based fees in 2016, up from 17% in

14 Performance-Based Fees: Usage Fund Sponsors 56% of fund sponsors reported paying performance-based fees for at least one account in % 60% Fund sponsor respondents that paid performance-based fees 55% in % in % Fund's managers that are paid performance-based fees 59% in 2009 Exposure to alternatives including hedge funds, hedge fund-of-funds, private equity, and real estate accounts for much of the use in performance-based fee structures. 20% 0% Mandates awarded in the previous 18 months that use performance-based fees 64% of investment management firms offered performance-based fees in % in % in 2011 Investment Managers 80% 60% 40% Investment manager respondents that offered performance-based fee arrangements Firm's clients that paid performancebased fees 64% in % of managers clients paid performance-based fees in 2016, up from 17% in % 0% New business opportunities that have asked about the availability of performance-based fees 11

15 Performance-Based Fees: Mechanics Source of valuation for calculating performance-based fees * Managers Fund Sponsors 67% 45% 56% 50% 50% of fund sponsor respondents used the manager as the source of valuation for calculating fees; 45% used the custodian to value assets 56% 20% Custodian Manager Fund Sponsor Other 5% 10% 67% of managers relied on custodian to value assets How fees were handled during the start-up period * Managers Fund Sponsors Fund sponsor and investment manager negotiated a fee schedule for the start-up period 26% 41% During the fund s start-up period (before the performance measurement period has passed) Fees handled according to the published fee schedule during the first year (or other established measurement period) 35% 58% managers and fund sponsors assessed fees in multiple ways. Other 5% 20% Managers reported that fees were most often negotiated in the start-up period, while fund sponsors indicated Inception-to-date results annualized to calculate fees until a longer track record is established 11% 7% that pro-rating fees was the most frequent method. * Multiple responses were allowed 12

16 Performance-Based Fees: Top Asset Classes Fund Sponsors Frequency of performance-based fee arrangements by asset class Hedge Funds Private Equity Infrastructure Always Frequently Sometimes Rarely Never 60% 20% 20% 54% 31% 8% 8% 38% 13% 25% 13% 13% Number of Respondents* * Consistent with previous survey findings, performance based-fee arrangements were most commonly used by alternative investment strategies. Managers reported little use of these fee arrangements with Real Estate 29% 20% 20% 40% 17 traditional, public market mandates. Hedge Fund-of-Funds 20% 20% 20% 40% 5 High Yield Fixed Income 8% 8% 83% 12 Non-U.S. Equity 14% 14% 21% 50% 14 U.S. Small Cap Equity 8% 8% 15% 69% 13 Core Fixed Income 8% 8% 83% 12 U.S. Large Cap Equity 7% 20% 13% 60% 15 Non-U.S. Fixed Income 30% 70% 10 Core Plus Fixed Income 18% 82% 11 U.S. Mid Cap Equity 17% 8% 75% 12 Global Equity 9% 18% 73% 11 Emerging Market Equity 8% 92% 13 * Note the small number of respondents 13

17 Performance-Based Fees: Top Asset Classes Investment Managers Percentage of clients that paid performance-based fees for each asset class managed Number of Respondents Investment managers indicated Hedge Funds 57% 27 that the highest percentage of their clients pay performancebased fees for alternatives, but at a lower rate in 2016, compared to Private Equity Real Estate Hedge Fund-of-Funds 25% 39% 49% % of hedge fund clients paid performance-based fees, down from 75% in Infrastructure Absolute Return Commodity Funds 9% 18% 20% U.S. Mid Cap Equity 8% 46 Emerging Market Equity 8% 39 U.S. Large Cap Equity 8% 60 Global Equity 7% 49 U.S. Small Cap Equity 6% 66 Core Fixed Income 5% 36 Non-U.S. Equity 4% 39 Non-U.S. Fixed Income 2% 23 Core Plus Fixed Income 1% 27 High Yield Fixed Income 1% 31 Balanced 0% 26 Money Market 0% 16 Source: Investment manager questionnaire responses 14

18 Investment Manager Published Fee Reviews How often the published fee schedule is reviewed Industry sources used to evaluate fees * Other 3% No published fee schedule 3% As needed 39% 39% As needed None Peers 16% 71% When a new fund/strategy is established 5% Consultants 100% Between two and five years 7% Quarterly 11% 31% Annually Other 13% 100% Turn to consultants when reviewing fees * Multiple responses were allowed 15

19 Investment Manager Published Fee Alterations Frequency of changes to published fee schedule Annually 2% Other 5% Never 5% More than every five years 7% When a new fund/product is established 7% Between two and 5 years 9% 65% As needed Almost two-thirds of investment management respondent firms altered their published fee schedules on an as needed basis. Only 2% reported making changes annually, similar to 2014 results (3%). Five percent never change published fee schedules, again on par with 2014 (6%). Changes to published fee schedule 100% 80% 60% 40% 20% 0% No changes Change breakpoints Lower fee minimums Raise fee minimums Lower fees Raise fees Looking at changes over time, the majority of investment management firms reported making no changes to published fees in each year examined. When firms did make changes, lowering fees was the most common action. In 2017, 21% of managers plan to lower fees, representing a modest downtick in activity relative to 2016 (24%). 16

20 Fund Sponsor Frequency of Fee Reviews Frequency of fee review Biannually 5% Quarterly 12% Other 10% Never 2% More than every five years 2% Annually 48% 48% Annually 100% 61% Turn to consultants when reviewing fees Saw no change in frequency of fee negotiation Every five years 10% Every three years 10% Every two years 2% Sources used for fee comparisons when evaluating fees* Fund sponsor changes in fee negotiations over time Consultant(s) 100% 100% 80% Fee negotiations increased Fee negotiations decreased Peers 71% 60% Fee negotiations did not change Other 13% 40% None 16% 20% 0% * Multiple responses allowed 17

21 Fee Negotiation Practices Among Investment Managers 83% Of investment managers negotiated fees, down from 91% in % Negotiated fees with New clients With 48% of new clients, on average 76% Negotiated fees with Existing clients With 15% of existing clients, on average 66% Negotiated fees for all mandates Frequency of fee negotiations by client type Public Corporate Endowment/ Foundation Multi-Employer Other Always Frequently Sometimes Rarely Never 8% 4% 4% 4% 5% 17% 13% 17% 19% 24% 59% 62% 57% 59% 52% 13% 23% 15% 16% 16% Public funds most frequently negotiated fees as reported by investment managers; endowments/foundations typically negotiated fees the least. 2% 2% 6% 1% 1% 18

22 Fee Negotiation Practices Among Fund Sponsors Frequency of fee negotiations by asset class Hedge Funds Hedge Fund-of-Funds Always Frequently Sometimes Rarely Never 25% 17% 33% 8% 17% 25% 13% 38% 13% 13% Number of Respondents 12 8 * Alternatives top the list of strategies where fee negotiations occur most frequently Private Equity 25% 13% 25% 19% 19% 16 U.S. Small Cap Equity 23% 18% 36% 14% 9% 22 Emerging Market Equity 20% 15% 35% 15% 15% 20 U.S. Large Cap Equity 20% 12% 48% 16% 4% 25 Non-U.S. Equity 20% 12% 44% 16% 8% 25 Non-U.S. Fixed Income 19% 19% 31% 25% 6% 16 Real Estate 18% 14% 27% 23% 18% 22 U.S. Mid Cap Equity 17% 11% 44% 22% 6% 18 Infrastructure 15% 31% 23% 23% 8% 13 Core Fixed Income 13% 13% 46% 17% 13% 24 Global Equity 12% 18% 41% 18% 12% 17 Core Plus Fixed Income 12% 12% 53% 18% 6% 17 Commodity Funds 11% 22% 44% 11% 11% 9 * High Yield Fixed Income 11% 17% 56% 11% 6% 18 * Note the small number of respondents 19

23 Primary Discounts Applied to Multi-Mandate Portfolios Indicate the fee structure(s) you have in place for clients with multiple mandates Other Discounts applied to sum of all fees 27% 31% Other responses include: We utilize a tiered fee schedule based on the combined mandates' assets No current clients with multiple mandates 22% Typically no discounts given but will depend on asset size No discounts given 16% Accounts may be aggregated but only within the same investment team (typically the same strategy) First product funded changed first* 8% Most expensive product changed first* 2% Highest funded product changed first* 2% * Next product changed as incremental funding level. Multiple responses allowed. 20

24 Fee Negotiation Practices: Most Favored Nation MFN clauses generally dictate that an investment manager will give a fund sponsor investor the lowest fee available to other comparable investors 77% have most favored nation (MFN) clauses in place with any clients With 30% of clients, on average Classification for nations, or groups of like clients* By investment size By strategy type 67% By vehicle type 40% 70% By product type 36% Motivating Factor * Case-by-case basis with clients that inquire about MFN clause 76% By fund type Other 16% 34% Other 17% By domicile 15% Based on fund size 11% By fund size 15% Based on fund type 7% By tax status (exempt or not) 11% Based on length of relationship 2% By length of relationship 11% * Multiple responses allowed 21

25 Top Fee Concerns Fund sponsor organizations biggest concerns regarding fees 49% Whether active managers are providing the value-added to justify the fees Ensuring that the fees paid for the fund are competitive with comparable offerings 36% How to best benchmark fees against peers and what is available in the marketplace 13% Other 3% 22

26 Published versus Actual Fees The following pages report on published versus actual fee data, when available, on 20 different asset classes. Published (or standard) fee information for most asset classes is sourced from Callan s investment manager database, where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. Actual fees differ from published fees to varying degrees, depending on the asset class. In Appendix I we include published fee distributions for 18 additional asset classes and sub-asset classes, including large cap core, value, and growth equities and others. Asset Class Coverage Active U.S. Large Cap Equity U.S. Small / Mid Cap Equity Non-U.S. Equity Non-U.S. Small Cap Equity Global Equity Emerging Market Equity Core Fixed Income Core Plus Fixed Income High Yield Fixed Income Long Duration Fixed Income Global Fixed Income / Emerging Market Debt Passive U.S. Large Cap Equity U.S. Smid Cap Equity Non-U.S. Equity U.S. Broad Market Fixed Income Alternatives Real Estate Private Equity Hedge Fund-of-Funds Direct Hedge Funds Note that differences between actual and published fees for all asset classes may reflect one or more of several factors: How much the published fee schedule is negotiated Differences in the actual and published fee database participants Hiring practices of individual fund sponsors (e.g., choosing lower fee products) Bundling of services when fund sponsor uses multiple manager products or services Institutional demand and product availability 23

27 Actual versus Published Fees: Active U.S. Large Cap Equity Active U.S. Large Cap Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees In active U.S. large cap equity, more of the investment activity at the institutional level is geared toward manager replacement or mandate replacement. Callan observes fewer investors making new allocations in the space. We ve observed substantial capital outflows since the Global Financial Crisis in large cap equity, with many funds transitioning to passive mandates, putting downward pressure on investment fees. Clearly account size matters, as the median actual fee paid is halved from 50 bps for the smallest accounts to 25 bps for the largest accounts. 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $50mm $50 to $150mm $150 to $300mm $300 to $600mm $600mm to $4bn We note that the high end of the fee spectrum across account sizes tended to be value and growth products, while those at the low end tended to be core. 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 24

28 Actual versus Published Fees: Active U.S. Small/Mid Cap Equity Active U.S. Small/Mid Cap Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Smid cap fees commanded a premium of around 20 to 30 bps over large cap for several reasons: The smid cap market space is less efficient, creating greater potential for alpha generation. Smid cap managers encounter capacity constraints that their large cap counterparts do not, and hence are able to maintain higher fee levels. Mandate size is less important for determining smid cap fees than it is for large cap fees; the largest mandate sizes in smid pay around 25% less than the smallest accounts, compared to a 50% discount in large cap. 120 bps 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $50mm $50 to $150mm $150 to $300mm $300mm to $1bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 25

29 Actual versus Published Fees: Active Non-U.S. Equity Active Non-U.S. Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Non-U.S. equity fees were strongly correlated with mandate size, with the largest accounts paying around 40% less than the smallest accounts in actual fees. For published fees, the discount at the median for the largest accounts was closer to 30% over the smallest accounts. We observe a much wider dispersion for actual fees for mandates less than $150mm in the range of 40 to 50 bps than for the largest mandates (closer to 20 bps). Published fee ranges, however, are consistent across mandate sizes at around 40 to 50 bps. 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $50mm $50 to $150mm $150 to $300mm $300 to $600mm $600mm to $3bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 26

30 Actual versus Published Fees: Active Non-U.S. Equity Small Cap Active Non-U.S. Small Cap Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Non-U.S. small cap mandates charged higher fees than large cap ones around 35 bps higher for the smallest accounts and nearly 50 bps for the largest accounts, according to actual fee distributions. This is largely due to capacity constraints; the typical capacity for a non-u.s. small cap strategy is around $2 billion. Given the substantial research and operational expenses in small cap, published and actual fees overlap more frequently in this asset class. The narrow range of actual fees for the largest accounts is attributable to the fact that this is a relatively new asset class with fewer available products. Subsequently there are not as many manager searches and/or placements. However, fee negotiations are more likely available for investors in nascent products. 120 bps 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $150mm $150 to $900mm 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 27

31 Actual versus Published Fees: Active Global Equity Active Global Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Compared to non-u.s. equity, global equity strategies charged actual fees around 10 bps lower for the smallest accounts and 5 bps lower for the largest accounts. Capacity for global equity is higher than non-u.s. equity, which can account for the lower fees across mandate sizes. Furthermore, investors with global exposure tend to have more assets under management, and hence the mandate sizes tend to be larger, enabling them to hit the lower end of the tiered published fee structure. Callan has observed an increase in search activity for global equity in the last several years. 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $100mm $100 to $300mm $300mm to $2bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 28

32 Actual versus Published Fees: Active Emerging Market Equity Active Emerging Market Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Fees have come down on the top end in the past decade as emerging market equities have become more efficient. Actual fees for the smallest accounts were around 120 bps at the 10 th percentile in 2011, and 95 bps at the median, according to Callan s historical survey. Actual fees have also come down for the largest accounts relative to 2011, from a maximum of 78 bps at the 10 th percentile and 66 bps at the median to 66 and 59, respectively, in Published fees have correspondingly fallen around 10 bps at the median across account sizes over the past five years. A recent spate of lackluster performance has also decreased demand for mandates in this space. Emerging market equities have become easier to trade. We are also seeing more transparency around governance and other traditional barriers to investment. 120 bps 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <= $100mm $100 to $300mm $300 to $900mm 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 29

33 Actual versus Published Fees: Active Core Fixed Income Active Core Fixed Income Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Core fixed income is an asset class in which Callan has observed a lot of fee negotiation. Many investors view it akin to a commodity. Core bond fees have a relatively small relation to mandate size; margins have tightened over time and pricing competition has increased for smaller mandates. Actual fees paid have decreased around 5 bps at the median for the smallest accounts compared to 2011, while the median published fee was consistent with five years before. For the largest accounts the opposite is true; the median published fee fell by 5 bps but the median actual fee held steady. However, the overall range of fees fell for the highest accounts by about 5 bps during this period. 40 bps 30 bps 20 bps 10 bps 0 bps <= $100mm $100 to $300mm $300 to $600mm $600mm to $2bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 30

34 Actual versus Published Fees: Active Core Plus Fixed Income Active Core Plus Fixed Income Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees The smallest accounts charge 5 bps more than core in published fees and 12 bps more in actual fees at the median; the premium is more muted for the largest accounts at 3 bps and 2 bps for published and actual fees, respectively. Compared to 2014, when Callan first began collecting fee data for core plus specifically, fees have actually crept up by a few basis points at the median for the smallest and largest accounts. 50 bps 40 bps 30 bps 20 bps 10 bps 0 bps <= $100mm $100 to $300mm $300 to $600mm $600mm to $2bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 31

35 Actual versus Published Fees: Active High Yield Fixed Income Active High Yield Fixed Income Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees High yield is a more research-intensive area of fixed income, hence there is more opportunity to add value through security selection. High yield mandates charged a premium relative to core plus fixed income: median published and actuals fees were around 20 bps higher across both small and large account sizes. Fees remained relatively unchanged compared to 2014, when Callan last collected robust data on this asset class. Investors tended to be larger plans with sizable allocations to diversify a broader fixed income portfolios. 80 bps 60 bps 40 bps 20 bps 0 bps <= $200mm $200mm to $2bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 32

36 Actual versus Published Fees: Active Long Duration Fixed Income Active Long Duration Fixed Income Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees This is the first year Callan has compared actual and published long duration fixed income fees in our survey. This sample includes a broad range of mandates such as multi-sector, credit, and customized strategies. Long duration strategies charge fees in the same range as core fixed income or a few basis points lower. Unlike other asset classes examined in this report, the discount for the largest account sizes over the smallest is modest at 5 bps at the median. Many long duration investors are implementing liability-driven investing plans with the goal of replacing equity risk with larger allocations to fixed income. Hence plan sponsors tend to make large, incremental allocations to this asset class as they move along a de-risking glide path. 40 bps 30 bps 20 bps 10 bps 0 bps <= $100mm $100 to $300mm $300 to $900mm 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 33

37 Actual versus Published Fees: Global Fixed Income and Emerging Market Debt Global Fixed Income and Emerging Market Debt Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees Global fixed income and emerging market debt strategies generally have fees that fall between core plus fixed income and high yield. These asset classes spend more on regional research, hedging, and trading in local markets, leading to higher fees. Emerging market debt strategies also charge more because of liquidity concerns and custody arrangements. However, the largest accounts enjoy significant fee breaks, around 40% lower than the actual median fee for the smallest allocations. 80 bps 60 bps 40 bps 20 bps 0 bps <= $100mm $100mm to $1bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 34

38 Actual versus Published Fees: Passive U.S. Large Cap Equity Passive U.S. Large Cap Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees While active U.S. large cap equity has seen substantial outflows in the past decade, passive mandates have absorbed many of those assets. Index fees have come down substantially over the past 20 years: Callan s 1997 Fee Survey revealed a median of 12 bps in published fees for the smallest accounts and 5 bps for the largest. Actual fees have shrunk as well, from a median of 15 bps for the smallest accounts and 5 bps for the largest to 4 bps and 1 bp, respectively. 15 bps 10 bps 5 bps 0 bps 3 bps 4 bps Median actual - all account sizes Average actual - all account sizes <= $100mm $100 to $300mm $300mm to $1bn $1bn to $4bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 35

39 Actual versus Published Fees: Passive U.S. Small/Mid Cap Equity Passive U.S. Small/Mid Cap Equity Fees (basis points) All Account Sizes 2016 published fees 2016 actual fees Average fees 6 bps Median actual - all account sizes 15 bps 6 bps Average actual - all account sizes 10 bps 5 bps 0 bps Published Actual $25mm to $2bn 10th percentile th percentile 7 8 Median th percentile th percentile 2 1 Average 5 6 Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 36

40 Actual versus Published Fees: Passive Non-U.S. Equity Passive Non-U.S. Equity Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees 6 bps Median actual - all account sizes 15 bps 6 bps Average actual - all account sizes 10 bps 5 bps 0 bps <= $100mm $100 to $600mm $600mm to $4bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 37

41 Actual versus Published Fees: Passive U.S. Fixed Income Passive U.S. Fixed Income Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees 4 bps 4 bps Median actual - all account sizes Average actual - all account sizes 10 bps 8 bps 6 bps 4 bps 2 bps 0 bps <= $100mm $100 to $600mm $600mm to $4bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 38

42 Actual versus Published Fees: Real Estate Core Open-Ended and Separate Accounts Real Estate Fees (basis points) by Account Size 2016 published fees 2016 actual fees Average fees 88 bps 93 bps Median actual - all account sizes Average actual - all account sizes 160 bps 140 bps 120 bps 100 bps 80 bps 60 bps 40 bps 20 bps 0 bps <=$50mm $50 to $150mm $150mm to $2bn 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 39

43 Actual Fees: Private Equity Private Equity (basis points) All Account Sizes 87 bps Median actual - all account sizes* 200 bps 80 bps Average actual - all account sizes* 150 bps 100 bps 50 bps 0 bps Separate Limited Accounts Fund-of-Funds Partnerships $5mm to $600mm * $1mm to $2bn * $1mm to $8bn * 10th percentile th percentile Median th percentile th percentile Average Count Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. * Net asset value. 40

44 Actual versus Published Fees: Hedge Fund-of-Funds Hedge Fund-of-Funds Fees (basis points) 104 bps Median actual - all account sizes 150 bps 115 bps Average actual - all account sizes 100 bps only 21% Of respondents have a performance incentive fees 50 bps Those performance incentive fees range from 2% to 5% 0 bps Published Actual $5mm to $250mm 10th percentile th percentile Median th percentile th percentile Average Count Published (or standard) fee information for most asset classes is sourced from Callan s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points. 41

45 Actual Fees: Hedge Funds Hedge Funds (basis points) by Account Size 149 bps Median actual - all account sizes 200 bps 142 bps Average actual - all account sizes 150 bps 100 bps 50 bps 0 bps <= $50mm $50mm to $250mm $250mm to $1bn 10th percentile th percentile Median th percentile th percentile Average Count 6 * 12 4 * Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. Note the small sample size. 42

46 Appendix I: 2016 Published Fees for Additional Asset Classes Large Cap Core Large Cap Growth Large Cap Value $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count Small Cap Core Small Cap Growth Small Cap Value $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count All Cap Equity Micro Cap Equity Smid Cap Equity $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count

47 Appendix I: 2016 Published Fees for Additional Asset Classes Unconstrained Defensive Government/Credit $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count Intermediate TIPS Global Fixed Income $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count Emerging Debt Active Cash $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm 10th Percentile th Percentile Median th Percentile th Percentile Average Member Count

48 About the Author Shane Blanton is a Senior Analyst in Callan's Published Research Group covering business analytics. He is responsible for data analysis and visualization to support Callan's research endeavors. In addition, he is responsible for measuring and benchmarking Callan's communications campaigns. Previously Shane was a member of the Analytical Solutions Group for three years, training Callan's clients to use PEP software. Prior to joining Callan, Shane worked as an Account Manager for an IC packaging manufacturer, and also worked as a trading assistant to a proprietary options firm. Shane attended Carnegie Mellon University, where he earned a B.S. in Business Administration. 45

49 Disclosure 2017 Callan LLC Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of this publication. This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. Reference to or inclusion in this report of any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Callan is, and will be, the sole owner and copyright holder of all material prepared or developed by Callan. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by Callan without permission. Callan s clients only have the right to utilize such material internally in their business. 46

50 About Callan Callan was founded as an employee-owned investment consulting firm in Ever since, we have empowered institutional clients with creative, customized investment solutions that are backed by proprietary research, exclusive data, and ongoing education. Today, Callan advises on more than $2 trillion in total fund sponsor assets, which makes it among the largest independently owned investment consulting firms in the U.S. Callan uses a client-focused consulting model to serve pension and defined contribution plan sponsors, endowments, foundations, independent investment advisors, investment managers, and other asset owners. Callan has five offices throughout the U.S. For more information, please visit About the Callan Institute The Callan Institute, established in 1980, is a source of continuing education for those in the institutional investment community. The Institute conducts conferences and workshops and provides published research, surveys and newsletters. The Institute strives to present the most timely and relevant research and education available so our clients and our associates stay abreast of important trends in the investments industry. For more information about this report, please contact: Your Callan consultant or Anna West at westa@callan.com 2017 Callan LLC