More than a quarter of the fund industry’s sales to institutional investors, which includes pension funds and insurers, now include a discount, according to Casey Quirk, the consultancy.
Jeff Levi, a partner at Casey Quirk, says asset managers are “hungry for assets” but an oversupply of managers competing for the same assets, large redemptions from sovereign wealth funds and negative growth in the institutional space is forcing fund houses to discount the fees they charge new and existing clients.
“Fee pressure is here to stay and will continue to increase pretty fast,” he adds.
Casey Quirk found that a large pension fund with €400m to invest can get discounts of 25 per cent in Europe, while smaller institutions investing the same figure will pay 19 per cent less than the quoted price. These figures were 21 per cent and 17 per cent respectively a year ago.
Nimisha Srivastava, head of research for Europe, the Middle East and Africa at Willis Towers Watson, the consultancy, says: “In a time of growing market uncertainty, asset managers value the stability of institutional capital, such as pension fund capital, and are willing to collaborate to structure appropriate fund terms or offer discounts.”
The Casey Quirk study, which asked 60 asset managers across Europe and North America about their fee models, found new clients investing for the first time with a fund house will be offered discounts of 22 per cent in Europe and 16 per cent in the US.
The biggest discounts were offered to institutions that backed new products. Asset managers are tempting investors to new products by marking fees down 37 per cent in Europe or 22 per cent in the US.
Hugues Gillibert, founder of Fitz Partners, which researches fees in the fund industry, says discounting fees for new products makes “great commercial sense”.
The push to reduce fees comes as pension funds are withdrawing more money from asset managers than they are investing with them, leaving many fund houses struggling to grow.
Figures from Casey Quirk showed that more than half of the world’s asset managers are growing solely based on markets, rather than by gaining new assets.
Mr Levi says: “There are some companies saying they will do whatever they can to build scale, which has led to extreme discounting in some markets.
“As it becomes even harder [for asset managers] to grow, companies will be willing to discount even more tickets.”
Despite the large reductions in fees, the asset management industry still boasts high operating margins — a measure of profitability — of 32 per cent.
Piers Bertlin, principal at Mercer, the investment consultancy, says: “One of the joys of fund management is that incremental new revenue flows straight to the bottom line, so winning new assets makes commercial sense even on discounted rates, provided it does not compromise fee rates for existing business or affect the fund manager’s ability to outperform.”