The Era of Fee Compression?
Investment officers at the UK’s £180 billion Local Government Pension Scheme today added their voices to a growing chorus calling for better disclosure of asset managers’ “hidden” costs and fees.It's about time global public pension funds had a real discussion on fees. In a deflationary world with paltry returns, fee compression will be on top of the agenda.
Executives responsible for running the council workers’ pension scheme, which consists of 100 sub-funds administered by local authorities across the UK, gathered in the Cotswolds Tuesday for the annual NAPF Local Authority conference.
Investment fees were top of the agenda. Jonathan Hunt, head of treasury and pensions at the Tri-Borough, a co-operative venture between Westminster, Hammersmith & Fulham and Kensington & Chelsea councils in London, told delegates: “As a user of fund managers, we are very aware that many costs are ‘hidden’.
“I don’t mean this in a malignant sense. I only mean there are many costs – transaction costs, taxes, trading costs, third-party brokerage fees – that I don’t get an invoice for, and so it’s difficult to challenge them.”
Hunt – who said he was quite happy for asset managers to receive fair compensation – said it was arguably more important for the investment industry to convince “regulators and legislators” that these costs were reasonable, as well as the pension funds themselves.
The UK national government has heaped pressure on council pension funds to reduce costs in the past year. Earlier this month, the local government minister, Brandon Lewis, set out plans for forcing or encouraging the funds to shift billions out of actively managed mandates and into index-tracking funds, saying this would save £190 million a year in transaction costs.
This has proved controversial in the sector. Joanne Segars, chief executive of the National Association of Pension Funds, which is organising the conference, said she had spoken to many delegates who argued that public funds already have low running costs, and many had successfully used active managers to beat their investment targets. Segars argued the government should allow funds "flexibility" on the question.
Lewis will address the conference on his reform plans later today.
Rodney Barton, director of the West Yorkshire Pension Fund, said he had pressed for, and got, full disclosure of transaction costs from managers through “contract notes”.
He said: “These identified all the costs, including stamp duty and commissions paid, because in certain markets, we found that managers were not supposed to be paying these away and they were.”
But Hunt said that many smaller local government schemes might not have adequate in-house staff resource to pore through all the investment information in such notes.
The debate at the LGPS conference comes against a wider backdrop of pressure on asset managers' costs. Two weeks ago, the Financial Conduct Authority said most managers were not disclosing enough about their charges on £131 billion of funds in the retail market.
The Investment Management Association has responded with a plan for “all-in”, “pounds and pence” fee disclosure, and a consultation with its members on how they should disclose portfolio turnover.
In recent weeks, I've discussed private equity's hidden fees and explained in detail Wall Street's secret pension swindle and how it's enriching the 1%, which now includes a bunch of overpaid hedge fund gurus charging 2 & 20 on multi billions. I also explained the great hedge fund mystery and why the alternatives gig is up as large pension funds like CalPERS start chopping their allocation to hedge funds.
Moreover, I explained why institutional investors and the financial media need to stop worshiping so-called hedge fund "gods" and get on to discussing what pension funds are paying all their external managers, brokers and useless investment consultants.
Many elite hedge funds and top institutional investors read my blog. They know my thoughts on why despite whiffs of inflation, the main threat to the global economy remains deflation. George Soros knows it too which is why he wants Japan's mammoth pension fund to crank up the risk.
But in a deflationary world investors worry about costs and fees. With the 10-year bond yield hovering around 2.5%, it will be much harder for investors to obtain their actuarial rate of return. This is why Bridgewater recently sounded the alarm on public pensions. Ray Dalio and Bob Prince aren't stupid. They too read my blog.
But I have a huge problem with the Bridgewaters and Blackstones of this world. It basically centers around alignment of interests. Let's do the math, shall we? When a hedge fund or private equity juggernaut receives 2% management fee on $100 billion+, that's a huge chunk of dough. Even 1% on these astronomical amounts is ridiculous for turning on the lights.
I recently challenged both Bridgewater and Blackstone to do away with management fees completely, share the pain of deflation, and set a hurdle rate of T-bills + 5% before they charge performance fees (PE funds all use a hurdle before they charge performance fees). Of course, neither of these mega funds will ever accept my challenge and why should they? Dumb public pension funds are more than happy to feed these alternative powerhouses and keep paying them outrageous fees.
The entire hedge fund and private equity model needs to be revisited. Nobody has the guts to say it but I think 2 & 20 is insane, especially for the large shops because it promotes lazy asset gathering and diverts attention away from performance. 2 & 20 is fine for hedge funds starting off but once they pass a threshold of assets under management, that management fee should be drastically reduced to 50 basis points or completely cut.
I know, it's so much easier collecting that 2% management fee, especially when managing billions, but the economics of such deals aren't in the best interests of pensions or their beneficiaries. Importantly, the institutionalization of the hedge fund and private equity industry has mostly benefited the large shops but at the expense of pensions which pay out astronomical fees.
I would love to take part in a panel to discuss fees and benchmarks of alternative investments. Speaking of which, AIMA Canada is going to be holding events discussing life after benchmarks in Toronto and Montreal. I was approached to find people for the Montreal event taking place next Thursday and suggested a few names as well as inviting me to be part of the expert panel (that didn't fly over too well because people know my thoughts on benchmarks).
My former boss, Mario Therrien, and former colleague, Mihail Garchev, will be speaking. I might attend but to be honest, the topic bores me to death and I will revisit it again when I delve deeply into the annual reports of Canada's public pension funds. Mihail will do a great job researching the topic but he needs to polish up his presentation skills. Mario is an excellent speaker but he will be defending his benchmark fiercely, which isn't really representative of his underlying portfolio.
Anyways, enough of that, the focus of this comment is fees or more precisely, why in an era of deflation and severe underperformance from active managers, fees must come down drastically, especially at the large shops managing billions. To all of you gurus managing several billions, take my challenge and see how rough it is when you do away with that all-important management fee which you receive no matter how poorly you perform.
Finally, let me take a moment to thank institutional investors who recently contributed to my blog. I am waiting for many more to subscribe and/or donate via the PayPal buttons at the top of this page. Also, I am done accepting meetings with hedge funds and private equity funds. If you want something from me, the minimum donation is $500 and if you want me to help you open doors (only if you're good and pass my due diligence), the minimum is $1000. The $5000 a year option is for special clients who need consulting services.
I am also open to steady work but it will be on my terms and you better get ready to pay up. I know my worth, my contacts alone are incredible. I'm not lowering my standards for anyone and I am not in a position to relocate, so if you have anything interesting to discuss for a job where I can remain in Montreal, contact me directly at LKolivakis@gmail.com. Don't mistake this as arrogance or desperation, it's called self confidence and I am not going to jump on anything even if it pays well.
Below, CNBC reporter Lawrence Delevingne explains why hedge fund managers usually make much more money than their mutual fund counterparts -- and how that could change if enough switch over.
Delevigne focuses on the 20% performance fee but as I state above, the 2% management fee is the real problem, especially for the large shops managing billions. Many of them have become large, lazy asset gatherers who focus more on marketing than performance. Things are slowly changing but the era of fee compression has just begun and in a deflationary world, fees will keep falling hard.