The rise of external management fees paid by pension funds and other institutional investors are the largest part of total fund expenses, rising 55 percent over that last 15 years, according to a survey by Callan Associates.
The survey, which included 49 fund sponsors with a total of $219 billion in assets, found that the external fees accounted for 90 percent of total expenses. That's up from 83 percent in 1998, the first year Callan collected the data.
The survey, completed in April and May with public and private pension fund and foundations and endowments, showed that higher fees did not necessarily mean better returns. For average absolute returns, Callan reported, those in the bottom quarter of fees paid outperformed those in the top quarter when compared over one year and five years. For three- and 10-year periods, the reverse was true.
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Besides rising fees, Callan noted falling custody costs and a shift of assets out of U.S. equity into non-U.S. and global equities, real estate, hedge funds, and private equity over the last 15 years.
In addition, Callan found that average total fund expenses have risen more than 50 percent since 1998. Last year, funds spent an average of 54 basis points of total assets to operate.
Funds with less than $1 billion in total assets pay a premium (65 basis points, on average) to administer their funds compared to mid-size (47 basis points) and larger funds (48.5 basis points). This is attributable, Callan said, to differences in asset allocation.
U.S. equity fees, the survey said, relative to total fund size, have declined 14 percent (to 33.5 basis points, on average) since 2008. Non-U.S. equity fees fell nearly 20 percent, while the average spent on non-U.S. fixed income increased 54 percent. U.S. fixed income fees rose 12 percent.
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