Fees for All
The vendor and consumer relationship and its ties to fee bartering can be traced back to our forefathers. However, for many, recent examples exhibited through the investment manager/plan sponsor relationship may conjure up one’s experience with a used car salesman or the time-shared in swindling down prices for a new home with a real estate agent.
Recently, pension funds both small and large and even enormous have backed the initiative to gain investment management services for a lesser price. While many point to higher liabilities and abysmal funding status as the primary culprits of this demand, the line of fee reductions, and its link to winning investment mandates, has become more and more blurred in this post-economic recession.
Ennis Knupp + Associates Director of Marketing and Communications Hank Hakewill said “Institutional investors are interested in getting management fee reductions, given an ongoing emphasis on reducing their costs and enhancing their investment returns.”
Examples of this push can be seen at some of the country's largest retirement plans. For instance, the roughly $68.7 billion North Carolina Retirement System (NCRS) said in June that it had successfully negotiated fee reductions for five of its money managers. The review in fees, according to state Treasurer Janet Cowell, came as result of an April fiduciary review conducted by Ennis Knupp.
At the time of the fee announcement, Cowell said that the 10th largest system in the country agreed to terms with Boston-based equities manager Numeric Investors, U.K.-based Longview Partners, which offers a global equity and a long/only absolute return strategy, and Relational Investors, a San Diego-based firm which provides a large-cap and mid-cap equity product. Additionally, New York-based equity manager TimesSquare Capital Management and Turner Investments, a Berwyn, Pa.-based firm with growth equity, quantitative and core/value equity funds also agreed to lower their rates.
“Our total cost to manage the pension fund is extremely low,” Cowell said in the June announcement. “However, it is important to consistently work to find ways to save on expenses and provide the greatest return for our state’s public workers.”
Additional support for this fee revision claim also occurred in late July when Oregon State Treasurer Ted Wheeler said his administration successfully agreed to “separate pacts” with six different private firms that currently manage assets for the roughly $50 billion Oregon Public Retirement Fund (OPERF) and related state funds over the past year.
While Wheeler and his administration did not disclose names for the new firms due to “contract confidentiality,” he said in the release that one firm agreed to cut management fees by 20%, with another slashing costs by roughly 25%.
Wheeler went on to say in the July 28 announcement that private equity funds have been the highest performing investment category for the past three decades, with an average return of 16% per year. But, on the other hand, with great success comes higher fees. And as a result, Wheeler’s office said that private equity firms “typically assess substantial fees.”
“We are constantly on the hunt for the best opportunities and we do business with some of the best investing minds in the world,” Wheeler said. “But that doesn’t mean we will overpay for their services.”
Money talks
While restructuring of contracts and the fees associated with services have been seen on both the East and West Coasts, Ennis Knupp’s Hakewill pointed out that pension fund’s worth may be the ultimate motivator in these discussions.
“Given the size of their asset bases, larger funds have more leverage and thus are more likely to be successful in getting reduced fees,” he said.
Hakewill explained that the Chicago-based investment consultant utilizes investment clout, or rather assets under management to assist with the negotiation process.
“Investment mangers are aware that when Ennis Knupp is negotiating fees with them on behalf of a client, we represent nearly $2 trillion in assets under consultation,” he said. “This ‘buying power’ helps us negotiate well for our clients.”
Negotiation is an acquired skill
While many institutional managers see this renegotiation as a form of assistance in helping public and private plans improve their bottom line, Frank Minard, a partner at XT Capital Partners, a privately-owned firm that provides asset gathering services for alternative asset managers looking to delve into the U.S. institutional and family office markets, said that fee restructuring is usually centered around quarterly investment returns.
“It invariably comes up at the end of very poor performance, and I guess that’s not too surprising,” Minard, a previous Morgan Stanley Investment Management managing director and global head of marketing and client services, said in his comments. “Generally, money owners don't mind paying for performance, and therefore it’s not unusual for this topic to raise its head when performance in almost every asset class has had a period of underperformance.”
Minard, who currently sits as the chair of Strategy Committee for the Third Party Marketers Association (3PM), an organization that proves to “guide investment managers in understanding the role of third party marketers as partners in raising assets under management,” added that he would not call fee revisions an industry trend, but rather a sign of the times.
“I think generally, this is a topic that will die down, I don’t see this as a trend, and I think that when performance does turn around this will be a non-issue,” said the founder and former chairman of InvestorForce.
Also, chiming in on this non-trend point is Mike Rosen, a senior consultant and co-founder of Angeles Investment Advisors, a Santa Monica-based firm that provides investment advice to institutions and high-net worth families and individuals. He said that fee reductions are not something he is seeing across the board. “I’ve seen firms here and there [pursue this, where they] are looking to see some break,” Rosen explained. “I think it’s very firm specific; I’m not seeing it widespread.”
In looking to this point of performance related fee concessions, the process to incorporate revisions in already agreed upon investment contracts can be a long and very strenuous ordeal. Just ask emerging manager FIS Group, a Philadelphia-and Chicago-based emerging manager, which in recent weeks has been on the minds of trustees and staff at the Los Angeles Fire and Police Pensions (LAFPP) Board and its consultant R.V. Kuhns & Associates.
At an Aug. 5 meeting, the Board cited performance and staff restructuring as reasons as to why the equity manager should be terminated from its more than $106 million mandate. But this measure, which would free up nearly $680,000 in fees, was put on hold.
Furthermore, in his comments following the conclave, LAFPP General Manager Michael Perez told IMW that “the board directed staff to meet with FIS on fees and to report back to the board within 30 days with the expectation that they will provide a discount to their current fees, as other mangers have.”
At the time, firm CIO and CEO Tina Williams affirmed in an email that the firm was thankful for LAFPP’s acknowledgement of the added value that her emerging management firm has brought to the fund.
“We are deeply honored by their continued confidence in FIS Group and will continue to work to justify that confidence,” she said Aug. 6.
Industry indicators
Previously, back in the spring, fee concessions and its connection to private equity had seemed to be front and center in the financial media. At the end of March, the Institutional Limited Partners Association (ILPA) held a private equity roundtable discussion, which included such attendants as the California Public Employees’ Retirement System (CalPERS) CIO Joe Dear.
Following the meeting, Dear could not disclose whether he did in fact moderate the discussion, which was supposedly centered on fee structure and its ties to align investor and fund interests.
“It was a productive meeting and there was more agreement than disagreement,” Dear said. “There has been a lot said and written about the purpose of this meeting and it is important to emphasize that the focus was on the role of private equity in investment portfolios and the challenges and opportunities facing the industry.”
Additionally, Kathy Jeramaz-Larson, ILPA’s executive director, told IMW that “it was not a conversation about fees; it was a discussion around industry issues.” Jeramaz-Larson was unable to comment for this article.
Days following this discussion, media outlets also reported that through a nationwide analysis, the country’s largest public pension funds have not been seeing alternative fees bear their performance fruit. According to the study, plans paid nearly $17 billion in fees since 2000, while only a “few” had posted the promised benchmark of 20% to 30% in returns. The study referenced a Government Accountability Office report that stated that public pension assets have dropped 27.6% from 2007 to 2008.
This failure, according to the Paris-based HEC School of Management, “raises the question as to why they accept to pay this level of fees,” Oliver Gottschalg, a professor at the school, which led the study, said previously.
Paralysis by analysis
Moving forward, while performance of asset classes and the fees associated with management services may always be up for discussion, Minard said that institutional investors are missing their golden ticket.
“This is a particularly difficult period,” Minard explained. “[And] these are monies that have to be invested and people have to get more active with their allocations [because] there are some incredible opportunities out there.
“But there is a certain amount of paralysis by analysis, and as a result, people are not really taking advantage as they should of some of these opportunities that may not be around for sometime.”
Minard went onto say that he sees a “trade off between shorter lock ups and lower fees” in the near term as one of many answers to this fee concession hysteria.
“I think that institutional investors are going to become much more concerned with liquidity…than they will be in beating some benchmark, or some index, that they have absolutely have no control over,” Minard said.
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