Fee review, tailored benchmarking
Corporate Pension Fund, Europe | August 2019
Engagement at a glance
This investor engaged bfinance to benchmark the fees paid to their external investment managers. As part of the value-for-money analysis, bfinance created tailored benchmarks for each manager.
This investor is required periodically to review the fees they pay to third-party investment managers. The objective is not to minimise expenses but to ensure that the fees being paid are appropriate. Since the investor intended to conduct fee renegotiations, a key objective was to test value-for-money and provide compelling information and ammunition (where appropriate) for use in those discussions.
- bfinance provided detailed benchmarking of performance and fees paid to 14 external managers across 7 asset classes: European Equity, US Equity, Emerging Market Equity, Euro Credit, Euro Asset Backed Securities, Emerging Market Debt and US Loans.
- Fee analysis included the benchmarking of fees against closely defined peer groups of comparable managers, combining quantitative analysis with qualitative interpretation and insights from bfinance’s manager selection specialists.
- Understanding performance – not just the fee level – helps to determine value-for-money and support fee renegotiations. The team examined manager performance relative to ‘tailored benchmarks’ in order to assess the delivery of “beta” exposures, isolate skill beyond beta exposures and provide insight on the consistency of skill. Benchmarks are tailored to the specific manager, reflecting the multiple factor exposures present within their portfolio (e.g. Market, Value, Momentum, Low Vol et al). For example, in the case of an EMD Hard Currency manager, the performance appeared to be impressive but tailored benchmarking revealed that this was largely attributable to a high market beta (1.44) as opposed to alpha. Using the tailored benchmark reduces cumulative manager “alpha” from 6.7% to 1.7%.
- Although the client generally pays competitive fees, this EMD mandate was one of the areas identified for improvement and fact-based renegotiation.