How Norfolk judges investment fee value
Norfolk Pension Fund underwent third-party benchmarking of its investment management fees earlier this year to ensure value, but has warned against a focus purely on cost over quality.
Local authority pension schemes are working together with their consultants and fund managers to ensure their investment costs are not putting undue weight on members’ retirement assets.
Fees: in brief
- Annual management charge: A simple charge for the management of the fund's assets.
- Total expense ratio: Contains the AMC plus other costs, including registration, audit and depositary fees.
- Performance fees: The manager charges a base fee, then takes an agreed proportion of fees greater than that total.
Source: IMA
But pension fund investors and their consultants have warned against pressuring down one part of their management costs if it means lower performance, or that costs are simply diverted elsewhere in their portfolio.
“The one thing we have done is some third-party benchmarking of our fees,” said Alex Younger, investment and actuarial services manager at the £2.5bn Norfolk fund. “It is money well spent.”
Norfolk’s investment management fees increased to £2.1m in 2013 from £1.4m in 2012. But Younger said this rise had been partly due to some one-off dynamic currency hedging, which the scheme felt provided good value net of fees.
Younger warned against a focus on cost, adding: “A lot of the debate around this has been framed as lowest cost as opposed to value for money, and I think the two things are very different.”
Judging value
Norfolk takes a two-stage approach to appointing mandates. First, it judges whether a manager will be able to do what it has promised in terms of return, and then brings in the fee as part of the shortlist process.
Even in passive strategies, the cheapest is not necessarily held up as best value by investors. Younger raised the example of an index manager that may be two or three basis points more expensive, but has skill in rebalancing and managing stocks coming in and out of the index.
“We have a manager that is able to do that in a cost-effective manner,” he said. “We are seeing them add perhaps 10 basis points a year.”
Tim Giles, partner at consultancy Aon Hewitt, said the prospect of a tougher environment for investment returns has “elevated” the issue of fees among the company’s scheme clients.
But he warned against looking to the annual management charge as a measure of overall investment cost, adding: “[The] focus needs to be on total expenses to avoid squeezing one aspect of fees [only] to balloon another.”
It is easier for schemes to argue down fees where managers have spare capacity in their strategies – this becomes more difficult when capacity is tight. But schemes that can bring scale might be able to negotiate down charges.
“For managers launching new products, we are regularly offered very attractive concessions by managers to gather a group of cornerstone investors,” he added.
The Pensions Trust saved £1m over recent years from its investment feesby renegotiating with its fund managers. Such reductions are more difficult for smaller schemes and those investing in pooled funds to achieve, as they have far less room for manoeuvre.
Schemes need to ensure they are keeping value for money at the top of their minds, said Peter Dean, investment consulting director at Broadstone Corporate Benefits.
“I don’t see trustees probably asking enough questions,” he said. “It is something that will have to rise up the agenda.”