Scale economies in pension fund investments A dissection of investment costs across asset classes

Transcription

1 Scale economies in pension fund investments A dissection of investment costs across asset classes Dirk Broeders (De Nederlandsche Bank, Maastricht University) Arco van Oord (De Nederlandsche Bank, Erasmus University) David Rijsbergen (De Nederlandsche Bank, VU University) ICPM-CRR Discussion Forum: Global Challenges to Retirement Security June 7, 2016

2 2

3 Importance of analyzing investment costs Accountability perspective Public pressure for greater transparency on charges Efficiency perspective Investment costs reduce net rate of return and raise cost of providing pensions Market perspective Asset managers with higher returns and/or lower costs attract more assets under management 3

4 Contribution of the paper Comprehensive analysis of investment cost structures 225 Dutch pension funds in 2013 Unique and detailed cross-sectional dataset Figures validated by independent auditor and supervisor Management costs and performance fees Cost per asset class and sub-asset class Free from self-reporting biases 4

5 Key proposition Investment costs are negatively related to pension fund size Economies of scale (Bikker and De Dreu, 2009) More bargaining power for large pension funds (Andonov et al., 2011) Comparative advantage of internalization (Dyck and Pomorski, 2011) We also assess the impact of Type of pension fund Type of pension contract Interest rate hedging 5

6 Investment costs Management costs Costs of having assets professionally managed Fees for security selection, execution and disclosure Typically based on a percentage of assets under management Performance fees Costs contingent on a specific performance objective Commonly calculated as a percentage of investment profits, either over realized or unrealized excess returns (or both) All costs are expressed as annual basis points of AUM Total AUM or AUM in specific asset class 6

7 Descriptive statistics Mean Minimum Maximum Total Portfolio Management costs Performance fees

8 Mean Minimum Maximum Asset allocation Fixed Income % - Management costs Performance fees Equity % - Management costs Performance fees Real Estate % - Management costs Performance fees Private Equity % - Management costs Performance fees Hedge Funds % - Management costs Performance fees Commodities % - Management costs Performance fees

9 Descriptive statistics (cont.) Category Variable Number Type of pension fund Corporate Industry-wide Professional group Type of pension contract Defined benefit Defined contribution Category Variable Sample mean Explanatory variables Log size Duration fixed income portfolio Duration derivative overlay

10 Results part I: Pension fund level 10

11 Pension fund level All costs Total costs Management costs Performance fees Log size -7.67*** -7.81*** 0.14 Corporate pension fund 7.33*** 8.04** Professional pension fund 9.83* DC Duration fixed income -2.99*** -2.88*** Duration overlay N R

12 Results part I: Pension fund level Size Large pension funds pay lower total investment costs Economies of scale are fully driven by management costs Performance fees are not related to size Type of pension fund Corporate and professional pension funds report higher costs After accounting for differences in size and asset allocation Type of pension contract No statistical difference in investment costs between DB and DC plans Number of DC plans in the sample is small 12

13 Results part 2: Asset class level 13

14 Asset class level - Total investment costs Fixed income Equities Real estate Private equity Hedge funds Commodities Log size -4.76*** -7.75*** 14.55*** *** Corporate pf 5.12*** *** * Professional pf DC ** N R

15 Key findings total investment costs Large pension funds pay lower investment costs for fixed income, equities and commodities Diseconomies of scale in real estate Probably due to underreporting of true costs by small pension funds No economies of scale in private equity 15

16 Asset class level - Management costs Fixed income Equities Real estate Private equity Hedge funds Commodities Log size -4.83*** -8.49*** 11.30*** ** *** Corporate pf 5.21*** *** * Professional pf DC ** N R

17 Management costs Large pension funds benefit from economies of scale in fixed income, equities and commodities Now also economies of scale in private equity 17

18 Asset class level - Performance fees Fixed income Equities Real estate Private equity Hedge funds Commodities Log size ** *** 33.36*** Corporate pf Professional pf DC * N R

19 Performance fees Large pension funds pay higher performance fees for equities, private equity and hedge funds A possible explanation is that large pension funds have better excess to top decile investors (higher returns = higher fees) 19

20 Key points A pension fund that is ten times larger in terms of AUM has, on average, 7.67 basis points lower annual investment costs Corporate and professional pension plans pay higher investment costs compared to industry-wide pension funds Size is an important driver for economies of scale in fixed income, equity and commodities investments We find diseconomies of scale in performance fees for equities, private equity and hedge funds 20