Merseyside benefits from increased fee competition
The Merseyside Pension Fund has benefited from tough price competition between two large fund managers, the latest local authority scheme to drive down its investment fees.
Liverpool County Council
The growing battle for LGPS mandates, first reported by PW in September, has been described as a "price war" between investment managers. The latest deal sees the Merseyside mandate go for a very low fee, according to sources involved in the transaction.
This £1.4bn mandate lends weight to the view that LGPS and other schemes should ride the price competition wave and continue to push for lower fees paid from members' retirement savings.
Merseyside council decided to give the mandate to a pooled fund provided by State Street Global Advisors, which now manages more than £7bn of LGPS assets.
I've even seen big mandates go at lower, even zero, headline fee rates
Peter Wallach, head of the Merseyside Pension Fund, said: "We are required by EU procurement regulations to tender openly, and obviously we try to get the best price we can while also assessing the long-term stability of the company.
This mandate was formely invested with rivals UBS and Legal & General Investment Management, according to Wallach.
He added: "UBS, LGIM, and State Street are clearly all going to be around in the long term, but State Street gave a very good price, it was certainly very competitive."
Very low fees, such as that for Merseyside's assets, are sustainable due to the nature of the management, according to John Belgrove, head of investment at Aon Hewitt.
"Passive management is a commodity business that benefits from economies of scale, so revenue for each new mandate can largely drop straight to the bottom line," he said.
Belgrove pointed out a distinction between pooled funds and segregated mandates, the latter requiring more individual management and therefore higher fees.
He added: "I've even seen big mandates go at lower, even zero, headline fee rates over the years due to the other sources of revenue generation that the client has agreed to."
Director of consulting at Russell Investments, Norbert Fullerton, emphasised that passive managers can build in other sources of income into transactions.
"These days it’s not all about the headline cost. There’s value in building up large assets under management," he said.
He added: "Perhaps we’re moving towards a model similar to that of Australia, where revenue is generated by what the manager does with the assets, rather than the fee itself."
State Street declined to comment on the transaction.