Institutional Investors Entering New Asset Classes, Paying Less in External Fees

The investment consulting firm bfinance released its 2018 Global Asset Owner Survey, compiling the responses of approximately 500 investors with combined assets of $8 trillion.

Commenting on the survey, David Vafai, bfinance CEO, says the research reveals a fundamental tension faced by investors.

“There is a gulf between the returns that many investors require and the widespread expectations for what a traditional portfolio may be expected to deliver through the coming decades,” he warns. “With investors making substantial changes to improve long-term risk-adjusted returns, the job of the investor CIO is getting harder and successful delivery is becoming increasingly reliant on the quality of implementation decisions.”

The majority of respondents are from pension funds (66%). Fifty-three percent of respondents are from North America. Result highlights of the report include the following:

• Sixty-six percent of investors have entered a new asset class or strategy in the last three years. Private debt, infrastructure, real estate, emerging market equity and alternative risk premia (rules-based, multi-asset, long/short investment strategies which have historically been employed by hedge funds), are the most popular new additions.
• Despite rising complexity and illiquidity, only 27% of investors are spending more overall than they did three years ago—41% spend less. At the same time, 51% are paying less in external manager fees, versus 17% who have seen fee spend increase.
• Cost reductions are evident across asset classes—not just in equity. Key tactics include renegotiation, mandate consolidation, external fee benchmarking, transaction cost analysis (TCA) and co-investment. Only 37% believe that performance fees are an effective way of aligning interests.
• Thirty-one percent have shifted towards passive management and 20% have moved towards smart beta. But respondents expect active managers to outperform in the next 12 months.
• Thirty-two percent of investors have made significant changes to risk management in the last three years, with another 14% planning to do so in the next 12 months.
• Forty-one percent say environmental, social and governance (ESG) will play a major role in future manager selection; 10% have terminated/changed managers due to ESG reasons. While 45% believe that good ESG integration requires an active (as opposed to a passive/systematic) approach, 19% disagree.