Australian Investors Lead Global Cost-Cutting Trend
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Investors in Australia and New Zealand lead the world in terms of improving efficiency, reducing fees and introducing new strategies, according to fresh asset owner research. However, their total costs – as a percentage of fund assets – appear to be higher than the global average, suggesting more room for savings.
Cutting cost is not a virtue in itself: in the end, total returns net of costs will determine long-term success. Yet savings that do not come at the expense of performance can make a major difference to the bottom line over time. Spending is, therefore, one of the key subjects under scrutiny within the bfinance 2018 Asset Owner Survey: Innovations in Implementation.
This study reveals that investors around the world have managed to reduce their costs over the past three years and, in particular, the fees that they pay to asset managers across various asset classes. With data from 485 investors representing around US$8 trillion, collected in May-June 2018, the findings show that these savings have been achieved even while portfolios have become more complex and teams have grown.
In Australia and New Zealand, the 37 participants (primarily superannuation funds) – with assets of over US$800 billion (>AU$1.1 trillion) – demonstrate even broader success in this regard than international peers. Looking globally, just 27% of investors have seen their total costs rise over the last three years as a percentage of assets, versus 41% who have brought them down. Yet in Australia/NZ we see an even stronger result, with 59% reporting a reduction. Looking at total external manager fees, global data shows that 51% of investors are paying less than they were three years ago, but that figure moves to 70% in Australia/NZ.
How have total costs (% of assets) and external manager fees (% of assets) changed versus three years ago?
However, the narrative of cost consciousness is not mirrored in the data on overall spending. At just over 0.7% of assets per annum, the average total costs reported by respondents in this region are still slightly higher than the global average (0.64%).
This cost reduction is far from being an equity-centric story. Examining the external manager fees paid by all respondents in various asset classes as a proportion of those asset classes (to ensure that asset allocation shifts do not muddy the waters), we find that spending on external management fees is also falling on average across private markets, fixed income and hedge funds.
While a large proportion of Australia/NZ respondents (81%) have made savings on equities, the same is also true across other sectors: half of investors in this region are paying less in private markets (as a percentage of private market assets) than they were three years ago, versus 29% of global respondents.
How have the following costs changed? GLOBAL
How have the following costs changed? AUS/NZ
Key tactics have included renegotiation, consolidation (larger mandates with fewer managers), external fee benchmarking studies, transaction cost analysis, more co-investment and, to a limited degree, insourcing. Among these, mandate consolidation proves to be particularly popular in Australia/New Zealand. This trend towards larger, fewer manager relationships is also borne out by the findings on strategic partnerships, with more investors using asset managers for advisory services and/or giving them more flexibility in their mandates.
While mandate consolidation is a popular “belt-tightening tactic,” we see an even more interesting picture when examining the change in the overall number of managers used by investors. These two developments are not synchronous – an investor can be adding managers (e.g. in new strategies) while consolidating mandates in another area. As such, we see that the average investor globally is using more managers today than they were three years ago. Yet more than a third of investors in Australia/NZ do expect to cut the overall number of managers used during the next three years, versus 18% of global peers.
Change in number of managers used (last 3 years, next 3 years)
The figures also reveal that Australia/NZ investors use more managers than their global peers, meaning that they may theoretically have more room to consolidate. The average number of managers used by investors here is 45 (median 40), compared with a global average of 27 (median 18). It is important to take note of the larger average size of respondents in this region, since manager numbers are strongly positively correlated with total fund size. However, if the global data on manager usage is re-weighted to match the Australia/NZ size distribution, the average number of managers only reaches 34 – still 9 short of the actual Australia/NZ figure.
The picture in Australia/New Zealand is not one of uniform economisation. Staff costs – one of the few exceptions to global investors’ cost-cutting – show an even stronger upward trend in Australia/New Zealand (51% are paying more on staff than they were three years ago, as a percentage of assets). These new team members are not necessarily in traditional investment roles: new approaches to ESG and significant changes to risk management, both of which feature in the survey, have also driven recruitment. Notably, this stronger focus on staffing is not linked to a greater degree of “insourcing”: 20% of investors here have increased the proportion of assets managed in-house, on par with the 19% figure globally.
Asset owners in this region have also been active in adding private market exposure, with half of respondents increasing their allocations to illiquid investments during the last three years – in line with the global figures. Interestingly, we see a strong pattern across the wider global data indicating that boosting private markets is not linked with greater overall spending: indeed, those that have higher allocations to illiquid investments than they did three years ago are significantly more likely to have reduced overall costs and fees than their peers.
The movement of Australia/NZ investors into passive equity has also been in line with global investors: 32% indicate that they’ve headed in this direction in the last three years, against 31% of the full group. However, the region shows a significantly greater current appetite for smart beta than average. While only 21% of investors in this region have moved towards smart beta over the last three years (similar to the 20% globally), 26% of Aus/NZ respondents are planning to move in this direction during the next 12 months – a very substantial trend.
Moving to passive and smart beta
Aside from smart beta, we also see distinctly stronger appetite in this region for Alternative Risk Premia – sometimes described as a cheaper alternative to hedge funds, although in practice a significant portion of the investors in this burgeoning asset class have not previously used hedge fund strategies. Indeed, ARP proves to be the most popular “new asset class/strategy” (alongside private debt) for investors in this region, whereas it sits in fifth place for the overall global results. This innovative strategy has played well in a climate where low costs, liquidity and systematic approaches are in tune with the zeitgeist.
The focus on spending has rarely been stronger than it is today, particularly in Australia where the arguments around consolidation and scale continue to dominate industry discussions. Yet there is one key area where investors must take care not to cut back: governance.
Indeed, the rising complexity and illiquidity of portfolios creates an increasingly pressing challenge: good governance of implementation. Compared with traditional public market investments, many increasingly popular asset classes exhibit higher performance dispersion, higher concentration, higher risk of capital loss, higher costs and a high degree of structural/industry change from one cycle to the next. In portfolios of growing complexity, we are also more likely to find “asset allocation” and “implementation” demands in conflict with each other.
We urge stakeholders and boards to be highly sensitive to these tensions and the conflicts of interest that they can create for investment advisors and investment staff. Robust governance frameworks have never been more important.
This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
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