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Overview of Investment Management
June 14, 2016
Why Do Plan Sponsors Pay Investment
Management Fees?
• All investment managers, whether active or passive, charge fees to their plan sponsor
clients. Passive managers charge the lowest fees relative to all investment managers.
• Fees for traditional active, public markets managers range widely depending upon the
asset class and sub-asset class.
• Fees for private markets managers tend to be in the 1.25% to 2% range and typically
involve an additional incentive component which may be structured in varying ways
– Percentage of performance earned above hurdle rate
– Percentage of performance earned relative to a benchmark
Alternative strategy fees:
Traditional active fees:
7‐30 bps for core fixed income,
2% + 20% incentive above hurdle rate for hedge funds and private equities
Passive fees: 35 to 100 bps for U.S. 0 to 20 bps
and Developed Markets equities 1
Why Do Plan Sponsors Pay Investment
Management Fees?
• Fees charged by active investment managers are required for the following:
– To cover compensation costs of all firm personnel which not only includes investment
professionals but also investment support personnel (research, trading, legal, compliance,
operations management, administrative support, etc.) and overhead (i.e., employee benefits,
rent, insurance, utilities, etc.),
– To cover costs of infrastructure and resources which support investment products (i.e., external
research, risk analytics, trading and guideline implementation systems, marketing and
distribution, etc.)
– To meet profit margin targets. Profits are necessary to:
ƒ fund future growth initiatives
ƒ allow for expansion of staff and resources
ƒ fund incentive compensation structures
ƒ provide capital cushion to weather volatile environments or periods or poor performance
ƒ provide capital to grant ownership to employees or to pay dividends to existing employee
• Fees differ by investment products
– Strategies that involve fundamental research require bigger staffs versus quantitative or modeldriven strategies.
– Strategies may have higher implicit and explicit costs versus others (i.e., external research, larger
broker/dealer spreads (e.g., EMD), high legal costs (e.g., high yield bonds), etc.)
– May require specialized expertise in market segment or industry (biotech, information technology,
etc.) etc. that is difficult to scale or expensive to maintain
Types of Fee Structures
• There are three types of investment management fee structures:
– Asset-based fees
ƒ Most commonly employed in traditional, public markets products
ƒ Pro: when markets decline, manager will experience lower fees
ƒ Con: generally increase over time as assets increase due to market movements
– Incentive-based
ƒ Most commonly employed in alternative investment products
ƒ Pro: aligned with client as fees increase when manager skill produces positive
results and decline when managers underperform performance hurdles or
ƒ Con: If not capped, can be outsized relative to benefit to clients from positive
relative performance. Also, may not be fully transparent or easy to communicate.
– Flat
ƒ Annual dollar fee; rarely used by investment management firms. Generally
employed by consultants and other non-investment management vendors
How are Fees Measured?
• Fees are measured on both an absolute basis and peer relative basis
• Absolute fee measurements involves measurement of fees in terms of impact on total
fund returns
– Large institutional investors pay absolute fees generally in the range of 30 bps to 70
• Peer relative fee measurement involves evaluation of fees versus peer strategies and
peer funds of similar size.
– Difficulties in peer fee comparisons due to:
ƒ Differences in asset allocation
ƒ Amount in active versus passive
ƒ Internal versus external management
– Other issues typically associated with peer measurements include survivorship bias
LACERS’ Fees Relative to Peers1
• LACERS costs for the 5-years
ended 12/31/13 were modestly
below peers, 50.9 bps versus 51.9
• Lower costs were driven by
implementation approach
employed by LACERS:
– Higher utilization of passive
– Lower exposure to alternatives
– Less utilization of fund of funds
– No overlays
Source: Investment Cost Effectiveness Analysis (December 31, 2013) prepared for LACERS by CEM Benchmarking
LACERS’ Fees Relative to Peers2
LACERS Public Markets Managers
U.S. Equities
Aronson, Johnson & Ortiz
PanAgora Asset Management
Principal Global Inv
Rhumbline Advisors ‐ S&P 500
Rhumbline Advisors 1000 Growth
Rhumbline Russell 2000
Rhumbline Russell 2000 Growth
Rhumbline Russell 2000 Value
Non‐U.S. Equities
Axiom International
DFA Emerging Markets
AQR Capital
Barrow Hanley
Lazard Asset Management
MFS Inst. Adv.
Oberweis Asset Mgmt
State Street Equity
Core Bonds
Baird Advisors
LM Capital Group
Loomis Sayles
Neuberger Berman
Credit Opportunities
Aegon USA
Prudential Emerging
Sankaty Sr Loan Fd L‐SL
Public Real Assets
Core Commodities
Universe Fee Median
Number of Managers in Universe
Universe Fee Ranking for LACERS Product
Universe Fee Range
25 bps
83 bps
66 bps
40 bps
0.60 bps
0.50 bps
0.50 bps
0.50 bps
0.50 bps
1st Percentile
45th ‐ 50th Percentile
20th ‐ 25th Percentile
5th ‐ 10th Percentile
1st Percentile
1st Percentile
1st Percentile
1st Percentile
1st Percentile
25 bps to 85.2 bps
67 bps to 100 bps
42.8 bps to 98.7 bps
36.9 bps to 96.5 bps
0.6 bps to 23.2 bps
0.5 bps to 5.5 bps
0.5 bps to 63.3 bps
0.5 bps to 12 bps
0.5 bps to 11.8 bps
47.2 bps
83.2 bps
77.6 bps
63.1 bps
4.1 bps
4.8 bps
8.3 bps
9.5 bps
9.5 bps
Separate Active Large Value Equity
Separate Active Small Growth Equity
Separate Active Small Value Equity
Separate Active Mid Core Equity
Separate Passive Large Cap Equity
Separate Passive Large Growth Equity
Separate Passive Small Cap Equity
Separate Passive Small Growth Equity
Separate Passive Small Value Equity
75 bps
52 bps
41 bps
78 bps
53 bps
57 bps
54 bps
95 bps
2 bps
25th ‐ 30th Percentile
5th ‐ 10th Percentile
5th ‐ 10th Percentile
35th ‐ 40th Percentile
35th ‐ 40th Percentile
50th ‐ 55th Percentile
40th ‐ 45th Percentile
70th ‐ 75th Percentile
10th ‐ 15th Percentile
27 bps to 161 bps
26.4 bps to 161 bps
26.3 bps to 161 bps
33.1 bps to 125 bps
32.2 bps to 98.2 bps
29.7 bps to 98.2 bps
20.8 bps to 98.2 bps
75 bps to 125 bps
0.2 bps to 30.1 bps
82.1 bps
81.7 bps
81.6 bps
81.8 bps
56.4 bps
55.8 bps
56.2 bps
91.5 bps
8.3 bps
Separate Active Emerging Markets
Separate Active Emerging Markets
Separate Active Emerging Markets
Separate Active EAFE Sm Cap
Separate Active EAFE Separate Active EAFE Separate Active Global‐Ex US
Separate Active EAFE Sm Cap
Commingled Passive Int'l Equity
12.5 bps
13 bps
12 bps
15 bps
4 bps
5th ‐ 10th Percentile
1st Percentile
5th ‐ 10th Percentile
15th ‐ 20th Percentile
70th Percentile
11.3 bps to 38.7 bps
13 bps to 29.4 bps
8.9 bps to 29.3 bps
8.9 bps to 29.3 bps
2 bps to 5 bps
23.5 bps
22.3 bps
20.5 bps
20.5 bps
3.4 bps
Separate Active Intermediate US Fixed
Separate Active Core U.S. Fixed
Separate Active Core U.S. Fixed
Separate Active Core U.S. Fixed
Commingled Passive Core U.S.
38 bps
47 bps
50 bps
5th ‐ 10th Percentile
30th ‐ 35th Percentile
50th ‐ 55th Percentile
33.3 bps to 75.8 bps
18.3 bps to 74.9 bps
46.9 bps to 69.4 bps
48.2 bps
51.5 bps
49.9 bps
Separate Active U.S. HY
Separate Active EMD
Separate Active Bank Loans
6 bps
86 bps
48 bps
10th ‐ 15th Percentile
75th ‐ 80th Percentile
5th ‐ 10th Percentile
1.6 bps to 25.2 bps
29.7 bps to 150 bps
9.3 bps to 90.7 bps
11.3 bps
64 bps
63.2 bps
Separate Active TIPS
Separate Active Commodities
Separate Active REITs
Sources: LACERS and Wilshire Associates Inc.
LACERS’ Fiduciary Duty with Respect to
• Fiduciaries are subject to strict standards of conduct because they must act on behalf
of the participants and beneficiaries of a retirement plan. One of the tenets of fiduciary
responsibility is to pay only for “reasonable” plan expenses.
• Reasonableness of fees is determined by comparing the fees of a strategy under
consideration with fees for peer strategies.
– Reasonableness can also be gauged by comparing strategy fees versus fees for
passive alternative, if available.
• Fees should be one of the components evaluated when selecting an investment
• After hire, fees should continue to be monitored to ensure they remain “reasonable”