Public plans provide institutional investors a means to extract a variety of industry intelligence. Even if you are not a public plan or do not work with a public plan, you can still gain a lot of knowledge from researching manager presentations, consultant presentations, research topics, asset allocations and fee-specific information.
- Better compare new managers. When sourcing a new manager, you need to understand the high and low fee range for the universe and be able to directly compare managers as you look to add them to your portfolio.
- Understand fee impact of increased allocations. When looking at the existing managers in your portfolio, you may be looking to increase your allocation and so would need to understand the fees that would be appropriate to accompany that increased allocation.
- Put consultant recommendations into context. When working alongside a consultant, this kind of analysis can help you to better evaluate the managers your consultant has brought to your attention or perhaps even adding managers to your consultant’s shortlist to explore in the future. For example, you might find a manager in the universe who is performing well and looks like they also have lower fees than their peers. If that manager was not on your consultant’s recommended list, that could be a good opportunity to understand why.
Comparing traditional asset manager stated fees to peers
When looking at a manager profile, what kinds of information can you see around fees? In this example, we will look at a US Core Plus Fixed Income strategy. This manager has provided eVestment with their fee structure for a few different vehicle types as well as their fee disclosures, and their sliding scale for different mandate sizes as well. However, from an investor point of view, this information is presented in a bit of a vacuum. Is this a good rate or is it expensive? How can you figure out how this compares to other managers?
Let’s look at the steps you would go through to research a potential manager replacement. In this example scenario, you are trying to replace a manager in the US Core Plus Fixed Income universe. Your mandate size is $50 million and you only want to research managers that are below 45 basis points. Now you can narrow down the universe of managers to only compare those that fit your initial criteria.
Using peer rankings, you can now start to get an idea of what other managers look like in comparison to each other as well as the larger universe to gain the most context. But looking solely at fees is not going to give you all the information you need. You might be comfortable paying a higher fee if you can get performance to accompany it. In this example, we will layer in a three-year trailing performance metric to compares the fees side by side. You can now see the trade-off between performance and fees in a more visual way. You may find two close-performing strategies that have a large disparity in fees. That might be an interesting conversation to have as you look to make your decision.
Researching actual negotiated fees
Let’s look at an example. This public plan is located in the mid-West U.S. and is a little over $2 billion in size. We can see each of the investment managers this plan is invested with, the fee schedule they have negotiated with each of these managers, the expense ratio and the annual fees. In this document, the consultant also provided their own industry average for each asset class based on their own study. And this plan has $140 million invested with our example manager from earlier.
Now you can compare side-by-side the actual negotiated fees against the manager stated fees. In this example, it looks like the client did a good job negotiating and will end up saving $20,000 a year on the actual fees they are spending. This plan wanted to look ahead to the future and gave themselves options to increase their allocation. Even for a relatively smaller allocation, there was still an opportunity to save.
Alternative investment intelligence
Public plans are a great source of information about alternative investments as well. In our example, this plan includes hedge funds, real estate, infrastructure and private equity in their allocations. You can see very detailed information on the fee schedule and expense ratio negotiated for this plan’s private investments as well.
You can look up these manager’s stated fees, and then find other examples of clients who are invested in this same strategy and get a sense of the fees they are paying. We found two examples – one client was paying the stated fee and one had been able to negotiate a lower fee. That shows there is some flexibility even on the alternative side. And interestingly, the smaller allocation was paying the lower fee where conventional wisdom would think that a larger allocation would be in a better position to negotiate. That is not always the case.
In real estate and private equity in particular, managers are typically much less willing to provide information. Using presentations and documents from public plans can be a way to shed light on these areas as you are doing your due diligence.
Consultant fee information
While our focus in this example has been on manager fees, public plans can also give insight into the consultant side of the ledger. You can find a lot of information on the different fees that plan pay their consultants for different levels of manager engagement. And even consultants themselves can use this information to make sure their prices and fees make sense relative to others prior to a pitch.
If you’re interested in learning to you can use public plan intelligence to gain knowledge from manager presentations, consultant presentations, research topics, asset allocations and fee-specific information, we’d be happy to show you how.