Institutional fees tipped to double by 2025

But as asset owners outsource their swelling portfolios more in the coming years, they will drive harder bargains with external fund managers, says consultancy Spence Johnson.
Institutional fees tipped to double by 2025

Asian institutions are set to drive down fees they pay to external asset managers as their bargaining power rises due to the growing concentration of assets and the lower returns on offer these days, according to a new report.

UK-based asset management consultancy Spence Johnson expects foreign fund houses to be taking in $13 billion in fees from Asian institutions by 2025, nearly double the $7.4 billion at end-2015. These findings form the second part of a study of institutional investors in 10 countries across the region.

The report estimates that third-party managers will receive a total of $25.2 billion in mandate fees in the region by 2025, with foreign managers taking 52% of that total. Foreign firms secured 55% ($7.4 billion) of the $13.4 billion in institutional management fees paid as of end-2015, despite overseeing only 45% of total outsourced assets under management (AUM).

Outsourcing growth

The fall in foreign fund firms' share of mandates will come as domestic managers gain a larger share of fast-growing markets such as China and Southeast Asia, said Ng Sze Yoon, director for Asia Pacific at Spence Johnson.

Still, the region’s expanding institutional asset pool will offset that decline, as more sovereign wealth funds (SWFs) are expected to be set up, and insurance and pension portfolios continue to grow, as reported in the first part of this study. Asian asset owners’ outsourced AUM is forecast to expand at 5.8% annually to reach $10 trillion by 2025.

The report found that Asian asset owners paid average fees of 24 basis points to external managers, a figure that rose to 27bp for SWFs, the highest among institutional types. Yet there are huge disparities across assets and markets, noted Ng. For instance, China Investment Corporation – with $814 billion in AUM – tends to pay lower fees as it has the most negotiating leverage. 

Pressure on fees

And fund managers’ investment fees are likely to come under increasing pressure, according to Cerulli. Asian asset owners will increasingly consolidate the range of external firms they use, Ng told AsianInvestor, as they need to be more centralised in terms of their decision-making processes and will concentrate more assets with selected managers.

This trend is already evident among Chinese and Taiwanese state pension funds, she noted. 

In China, public retirement funds will be centralised under the National Council for Social Security Fund (NCSSF) under the new public pension fund (PPF) system. The $285 billion NCSSF is expected to receive a further Rmb2 trillion ($300 billion) from the PPF pool over the coming years, according to China's Ministry of Human Resources and Social Security. Hence NCSSF is expected to drive down outsourcing costs as a result of greater bargaining power.

Meanwhile, Taiwan’s Bureau of Labor Funds has started to review external managers’ performance on a quarterly basis, meaning it might potentially terminate and redistribute mandates more frequently.

Moreover, asset owners are increasingly using passive strategies such as index funds or smart beta with an eye on lower fees, Ng said. “If they cannot get investment returns, they are going to cut costs,” she added, especially as yields are likely to remain low.

Downward pressure on fees seems unavoidable, she noted. “It happens in other markets across the world; as [institutions'] assets get bigger, they would definitely bargain for lower fees.” 

¬ Haymarket Media Limited. All rights reserved.