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2016 Cost of Doing Business SurveyU.S. Funds and Trusts

CALLAN INSTITUTE

Survey

November 2016

1 2016 Cost of Doing Business Survey Knowledge. Experience. Integrity.

Key Findings 2

Executive Summary 3

Respondent Group Profile 4

Investment-Related Expenses 8

External Investment Managers 18

Compensation 19

Staffing 22

Oversight 23

Correlations 26

Most Frequently Cited Cost Concerns 27

Methodology and Definitions 28

Table of Contents

2016 Cost of Doing Business Survey 2Knowledge. Experience. Integrity.

Callan’s 2016 Cost of Doing Business Survey reflects trends on 2015 expenses for 85 U.S. funds and trusts, including public plans, corporate plans, and endowments and foundations. In addition to key findings from 2015, it reveals trends and changes since 1998 when Callan first conducted this survey.

of total fund expenses go to external investment managers, on average

93%

Small 6.1 bps

Large 1.6 bps

Increase is borne by small funds, as custody costs by size reveal

of investment management roles received a bonus in 2015

58%

Our survey includes compensa-tion data on 13 different roles for fund management, including CIO, director, administration analyst, and others

Average number of total staff members to manage the fund 11

Most frequently cited cost concern:

Whether performance of actively managed funds is keeping pace with level of fees charged

Mid 2.0 bps

55% increase in custody costs over 3 years

of assets, on average, to operate funds in 2015

49 bpscorporate funds

51 bpspublic funds

107 bpsendowments/ foundations

Key Findings

63bps

18%Increase in investment management fees since 2012

See page 27 for more information.

See page 9 for more information. See pages 8 and 12 for more information. See page 17 for more information.

See pages 9 and 17 for more information.

See page 8 for more information.See pages 19-22 for more information.


Executive Summary

Managing the costs associated with running a fund or trust is paramount to the success of the fund, and is also a primary fiduciary responsibility of those who oversee pensions, endowments, foundations, and other asset pools. In this survey, Callan compares the costs of administering and operating funds and trusts in the U.S. across different fund types and sizes. The goal is to illustrate common practices employed by institutional investors and to empower asset owners with objective information to help manage expenses.

Responses were collected in early 2016 and reflect expense data for 2015. The results incorporate responses from 85 fund sponsors representing more than $400 billion in assets. In this report, we include comparisons with similar surveys Callan conducted in the past to highlight enduring and long-term trends in fund/trust management and expenses. Overall, our analysis suggests that external investment management, advisor (non-investment related), and custody fees increased since our last survey was published in 2013. We continue to see a trend of flows from traditional asset classes, like U.S. equity, into real estate, hedge funds, and private equity. Other key findings include:

– In 2015, asset owners spent an average of 63 basis points of total assets to operate their funds. Average total fund expenses have climbed more than 95% since 1998, when Callan first collected this data.

– External investment management fees continue to represent the lion’s share of total fund expenses at more than 90% of total costs, consistent with three years ago. This figure has grown steadily over time, from 83% of total fund expenses in 1998 to 93% in 2015. The increase can largely be attributed to growing allocations to more expensive alternative asset classes, namely hedge funds and private equity.

– Not surprisingly, smaller funds—defined as those with less than $1 billion in total assets—pay a premium (72.9 basis points, on average) to administer their funds relative to mid-sized and larger funds, and large funds pay the least. Large funds benefit from economies of scale, paying less for all aspects of fund management.

– By fund type, corporate funds pay a notably higher percentage of fund assets to non-investment management external advisors than their public counterparts. Many corporate funds are subject to ERISA and must comply with related regulatory and legislative requirements; the related investment and operational due diligence required for these funds often means higher fees. Endowments/foundations pay the most for investment management fees (85.7 bps), a reflection of higher allocations to alternatives.

– Ancillary costs such as custody and external advisor fees, including consulting services, also increased more for small-sized firms as compared to their mid- and large-sized counterparts. Custody fees, in particular, accelerated for small funds over the past three years, increasing 84% to 6.1 basis points, on average. The stark rise in average custody costs for small firms is attributable to an upward trending readjustment of fee minimums by custody banks.


Public 32%

Corporate 35%

Endowments/ Foundations 26%

Other 7%

Respondent Group Profile

Survey results incorporate responses from 85 funds and trusts, including 30 corporate funds (35%), 27 public funds (32%), 22 endowments/ foundations (26%), and 6 “other” fund types (7%). “Other” includes not-for-profit corporate plans and multi-employer/Taft-Hartley/union plans.

Sixty-eight percent of the assets represented by this respondent group are retirement assets (defined benefit). Defined contribution plans are not included in this survey.

By Fund Type

By Asset Type

68% Defined Benefit

32% Non- Retirement Assets

Note: Throughout this report, charts may not sum to 100% due to rounding.


Large (>$3 bn) 27%

Medium ($1 to $3 bn) 31%

Small (<$1 bn) 42%

Respondent Group Profile (continued)

Segregated by size, 42% of respondents have less than $1 billion in total fund assets and are defined as “small” funds for the purposes of this report. Nearly one-third of funds (31%) are “medium” with $1 billion to $3 billion in assets. The remaining 27% have greater than $3 billion in assets and are described as “large” funds throughout this report.

Respondents are primarily located in the Northeast (35%) and Central (33%) regions of the U.S.

Respondents by Fund Size

Respondents by Location

7% 33%

7%

35% 18%



Survey respondents collectively had $409 billion in assets in 2015.1 On average, respondents held the greatest percent of assets in U.S. equity (28%) and U.S. fixed income (27%). Looking at average asset allocations from Cost of Doing Business Survey respondents over time, we note U.S. equity allocations have declined substantially (from 54% in 1998 to 28% in 2015) while non-U.S. and global equities, hedge funds, private equity, and real estate gained assets.

U.S. fixed income has fluctuated, masking diverging allocations by fund types. Corporate funds tend to have more fixed income as trends to de-risk intensify, while public funds and endowments/foundations have moved into riskier assets in a search for higher returns.

At the end of 2015, 100% of survey respondents had assets in U.S. fixed income, and nearly all (94%) included U.S. equity in their portfolios (down from 98% in 2012). Nearly as many respondents (90%) had non-U.S. equity, and 85% invested in real estate (including REITs). Allocations to private equity were also common.

Average Respondent Assets by Asset Class (including historical surveys)

Percentage of Respondents Invested in Asset Classes

1 Most respondents (91%) provided data on assets and expenses as of 12/31/2015, and the remainder provided data with alternative year-end dates (6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016).

0%

20%

40%

60%

80%

100%

1998 2004 2008 2012 2015

Other

Real Estate

Private Equity

Hedge Funds

Cash

Non-U.S. Fixed Income

U.S. Fixed Income

Global Equity

Non-U.S. Equity

U.S. Equity

98% 86%

35%

100%

37% 37%

57%

73%

94% 90% 79%

100%

79% 84% 89% 85%

U.S. Equity Non-U.S. Equity

Global Equity U.S. Fixed Income


Hedge Funds

Private Equity

Real Estate

2012 2015

-4% +5% +126% 0% +114% +127% +56% +16%

Percent change shown above bars


33% 26% 26%

14% 14% 13%

5% 7% 6%

26% 28%

25%

2% 3% 2%

1% 1% 2%

7% 7% 6%

4% 4% 10%

5% 5% 7% 3% 5% 5%

Small (<$1 bn) Medium ($1 to $3 bn) Large (>$3 bn)

Other

Real Estate

Private Equity

Hedge Funds

Cash


U.S. Fixed Income

Global Equity

Non-U.S. Equity

U.S. Equity


Respondents’ asset allocations vary by fund size and type. The top chart reveals distinct trends by fund size.1 The smallest funds held more U.S. equity (33%, on average) than their medium and large counterparts (26% each). Large funds had greater average allocations to private equity (10%) and real estate (7%) than medium and small funds (4% and 5%, respectively, each). Interestingly, there was little variation to hedge fund allocations by fund size.

Endowments/foundations had an average allocation of 13% invested in hedge funds, compared to 6% for corporate funds and just 3% for public funds. Corporate funds held the highest percent of U.S. fixed income at 37%—an indication of the adoption of liability-driven investment structures and other portfolio de-risking strategies. Public funds held more real estate (8%) and a greater percent of the overall portfolio in publicly traded equities (52%) than corporate funds (46%) and endowments/foundations (46%).

Average Respondent Asset Allocations by Fund Size

Average Respondent Asset Allocations by Fund Type

1 Most respondents (91%) provided data on assets and expenses as of 12/31/15, and the remainder provided data with alternative year-end dates (6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016).

30% 30% 24%

15% 13% 15%

7% 3% 7%

25% 37%

16%

2% 1%

3%

2% 1%

1%

3% 6%

13%

5% 4%

8% 8%

3% 5%

5% 2% 7%

Public Corporate Endowments/Foundations

Other

Real Estate

Private Equity

Hedge Funds

Cash


U.S. Fixed Income

Global Equity

Non-U.S. Equity

U.S. Equity


35.6 39.4 41.5 47.3 54.4

63.3

0 bps

25 bps

50 bps

75 bps

100 bps

125 bps

1998 2001 2004 2008 2012 2015

Exp

ense

s re

lativ

e to

tota

l fun

d

Investment-Related Expenses

In 2015, funds spent more than 63 basis points, on average, of total assets to operate/ manage their funds. Average total fund expenses jumped 16% relative to 2012 (54 bps), and have climbed more than 78% since Callan first collected this data in 1998 (35.6 bps).

External investment management fees represent the largest expense at 93%. This figure has also grown steadily over time, from 83% in 1998. The increase reflects growing allocations to more expensive alternative asset classes (i.e., hedge funds and private equity).

The second-largest expense allocation is non-investment manager external advisor fees at 2.5%, followed by custody expenses (1.9%). Non-investment manager external advisor fees include third parties that conduct performance measurement and monitoring, auditing, legal, accounting, or other services (e.g., consultants, actuaries, other types of service providers).

Total Expenses Over Time

Major Expenses – 2015 Average Responses

93.1% External Investment Managers

2.5% Other external advisor (consultant fees included)

1.9% Custody

1.3% Total investment-related staff compensation (salary and bonus)

1.2% Other (e.g., investment operational, board/staff travel, etc.)

10th Percentile 118.1


Median 55.4



Average 63.3

# of Observations 52


Investment-Related Expenses (continued)

Many factors influence expenses, including fund size, usage of active versus passive management, the number of managers and their mandate sizes, and employment of alternative assets. In this report we present several of these factors in isolation to highlight their impact on total expenses.

External investment management fees rose 18% over three years, from 43.7 bps in 2012 to 51.7 bps in 2015. These fees are the primary driver of total fund expenses, making up 93%.

Other expense components have also ticked up. Non-investment management external advisor fees, which are the second-largest expense for most U.S. funds, have more than doubled since 1998. Other external advisors include investment consultants, actuaries, legal advisors, and other types of service providers.

Custody fees saw an uptick relative to three years ago, going from 2.2 bps in 2012 to 3.4 bps in 2015. Smaller funds have borne the brunt of this burden, as detailed later in this survey (page 17).

Expense Components Over Time

3.4

51.7

3.9 5.3

1.1 0 bps

10 bps

20 bps

30 bps

40 bps

50 bps

60 bps

1998 2001 2004 2008 2012 2015

Exp

ense

s re

lativ

e to

tota

l fun

d

Custody External investment manager

Investment-related staff compensation Non-investment management external advisors

Other


GAAP Accounting/ Disclosure Changes 3.2

Sarbanes- Oxley 2.7

0

1

2

3

4

5

Endowments/Foundations

HATFA impact of new PBGC Premiums* 4.7

Dodd-Frank 4.3

3

4

5

Corporate

GASB 67 3.3

GASB 68 3.3

0

1

2

3

4

5

Public


New regulations appear to be having a greater impact on expenses now than three years ago: 41% of respondents indicate that new regulations have led to increased operational expenses, up from 23% in 2012.

Conversely, risk management efforts have affected expenses for fewer funds (33% in 2015 vs. 42% in 2012). Risk management efforts can include adding in-house personnel (e.g., chief risk officers), purchasing third-party software or risk management systems, or hiring external consultants.

We gauged regulatory impacts by fund type, as the types of funds surveyed are subject to different laws and regulations (e.g., GASB 67 and 68 only impact state and local government defined benefit plans). Public funds indicated that GASB 67 and 68 had the greatest impact on expenses (3.3 weighted average score) and corporate funds flagged HATFA as having had the greatest impact (4.7). Disclosure changes made to GAAP accounting rules influenced endowments and foundations (3.2) the most.

Have operational expenses increased due to additional regulations?

Top Two Regulations with the Greatest Impact on Expenses (by Fund Type) (7 = great impact, 1 = no impact)

Have operational expenses increased due to risk management efforts?

* HATFA (Highway and Transportation Funding Act of 2014)

Yes 41%

No 59%

Yes 33%

No 67%


37%

19% 19%

11% 7% 7%

No changes planned

Other Review and/or renegotiate management fees

Renegotiate custody fees

Increase staff compensation

Restructure in-house vs. external investment costs


Nearly two-thirds of funds (63%) expect to make changes during the next two years that will impact fund costs. Consistent with our prior survey, reviewing and/or renegotiating fees—either management (19%) or custody (11%)—is the most frequently cited change. Staff compensation increases account for just 7% of responses, down from 15% three years ago. “Other” changes include exploring outsourced CIO advisors, increasing the percentage of passively managed funds, consultant reviews, and environmental, social, and governance (ESG) screening services.

Defined benefit (DB) and defined contribution (DC) plan administration remains largely separate at organizations that host both types of retirement plans, potentially leaving a source of expense reduction untapped. Consistent with 2012, only 18% of funds that have both DB and DC plans have unitized their assets. Another 26% of respondents have considered this option to reduce costs.

What is the biggest change you anticipate your fund/trust making over the next one to two years with respect to costs?

If you have a DC plan, have you considered unitizing the DB assets on the DC side for cost savings?

Yes, we have unitized assets 18%

Considered but not implemented 26%

Not considered or implemented 56%


0 bps

50 bps

100 bps

150 bps

Small(<$1 bn)

Medium($1 to $3 bn)

Large(>$3 bn)


OtherTo

tal F

und

Exp

ense

s


We examine total fund expenses by fund size and type. Not surprisingly, smaller funds pay a premium (72.9 bps, on average) relative to mid-sized (61.7 bps) and larger funds (53.0 bps). At the median, large funds (56.5 bps) actually pay more than medium funds (39.7 bps) in total expenses; this is because medium funds span a wider range of total expenses and some funds pay much more than others.

Cost differentials across fund size can be largely attributed to the scaling of investment management fees; larger funds benefit from the application of lower investment management fees because of larger individual account sizes. Allocations to more expensive alternative asset classes are also a factor. In addition to higher management fees, alternatives require capital calls, funded commitments, and more accounting support, leading to higher overall administrative costs. Endowments/foundations tend to have large allocations to alternatives, and also pay the most in total fund expenses at the median and average.

Total Fund Expenses by Fund Size and Type

* Note the small sample size.

10th Percentile 127.5 126.0 75.6 74.2 81.5 150.1 81.5 25th Percentile 97.2 64.2 69.4 64.0 64.2 144.3 63.9

Median 60.9 39.7 56.5 53.3 45.1 112.2 38.5 75th Percentile 50.1 24.1 33.6 41.4 26.9 68.1 25.3 90th Percentile 30.1 21.2 26.1 33.7 23.2 27.7 22.9

Average 72.9 61.7 53.0 51.4 49.2 107.3 48.5 # of Observations 20 16 16 19 16 12 5*


0 bps

15 bps

30 bps

45 bps

60 bps

75 bps

90 bps

Exp

ense

s re

lativ

e to

tota

l fun

d 0 bps

5 bps

10 bps

15 bps


Several factors influence fund expenditures on asset administration and management, including size of allocation to alternative assets (especially hedge funds and private equity), fund size, and percentage of fund managed internally and/or passively. These factors directly impact investment management costs, which are the single largest component of overall fund expenses.

Since 2012, custody expenses increased by 31% at the median (from 1.6 to 2.1 basis points in 2015), and the average jumped 55%, from 2.2 to 3.4 bps. Average external investment management fees also increased substantially (from 43.7 bps to 51.7 bps) and the range of responses (from the 10th to the 90th percentile) widened by 30 basis points, as some institutional funds have ramped up exposure to alternatives while others have shifted assets into low-cost index funds.

Major Expense Categories

External Investment

Management Fees

Non-Investment Manager External

Advisor Fees

Investment-Related Staff

Compensation

Custody Expenses

Other Investment Operational Expenses

2012 2015 2012 2015 2012 2015 2012 2015 2012 2015

10th Percentile 67.1 89.4 15.5 11.4 4.7 10.2 4.7 6.1 1.2 2.5 25th Percentile 57.6 68.9 7.0 8.5 3.0 4.1 2.8 3.8 0.6 0.9

Median 36.9 43.6 2.5 3.6 1.9 1.7 1.6 2.1 0.2 0.6 75th Percentile 29.9 26.9 1.2 1.9 0.8 1.1 0.7 0.8 0.1 0.2 90th Percentile 19.9 11.8 0.5 0.8 0.3 0.7 0.3 0.4 0.1 0.1

Average 43.7 51.7 6.4 5.3 2.7 3.9 2.2 3.4 0.6 1.1 # of Observations 40 52 39 53 31 33 35 53 14 40.0



We display five smaller expense categories by fund size in the top chart, and the largest fund expense—external investment management fees—relative to total fund expenses in the bottom chart.

Large funds benefit from economies of scale, paying less for all aspects of fund management. Medium-sized funds surveyed hold marginally larger average hedge fund, non-U.S./global equity, and non-U.S. fixed income allocations than their large counterparts, resulting in a greater portion of total fund assets spent on investment management fees.

Average Fund Expenses by Fund Size (bps)

Average Investment Fees vs. Total Fund Expenses by Fund Size (bps)

6.1 6.8

0.4

4.9

2.7 2.3 1.7 1.5 1.9

3.3

0.9

2.7

0.4 1.5 1.1

0.5 1.6 1.5

0.3 0.6 0.3 0.6 0.6 0.3

Custody Total investment-related staff compensation

Other external advisor

Consultant Accounting and audit

Actuarial Other investment operational expenses

Legal


54.1

72.9

51.9 61.7

48.5 53.0

External investment management fees

Total




We display five smaller expense categories by fund type in the top chart, and the largest fund expense—external investment management fees—relative to total fund expenses in the bottom chart.

Corporate funds pay a notably higher percentage of fund assets to non-investment management external advisors than their public counterparts. Many corporate funds are subject to ERISA and must comply with related regulatory and legislative requirements; the related investment and operational due diligence required for these funds often means higher fees.

Endowments/foundations pay the most for investment management fees (85.7 bps), a reflection of higher allocations to alternatives.

Average Fund Expenses by Fund Type (bps)

Average Investment Fees vs. Total Fund Expenses by Fund Type (bps)

1.9 1.6 0.3

1.8 0.7 1.1 1.0 0.9

3.7 3.5

1.3 2.1

0.5 2.1 1.7

0.6

6.0

8.3

0.4

6.5

3.7

1.0 0.4

Custody Total investment-related staff compensation

Other external advisor

Consultant Accounting and audit

Actuarial Other investment operational expenses

Legal


43.6 51.4

37.9 49.2

85.7

107.3

External investment management fees

Total


n/a


29% 36%

30% 25%

71% 64% 70% 75%

35% 38% 31%

38%

Total Public Corporate Endowments/Foundations

Active

Passive

Average % of portfolio managed passively(when not 100% active)

0%

20%

40%

60%

80%

100%

U.S. Equity Non-U.S.Equity

U.S. Fixed


The majority of respondents (83%) indicate at least a portion of their assets are passively managed. More than one third of public funds hold passive investments, while only one-quarter of endowments/foundations hold passive allocations. On average, funds allocate 35% of their total portfolios to passive investments, up from 2012 (25%).

U.S. equity attracts the greatest passive allocations (38% of the total allocation to this asset class, on average) among respondents that utilize passive investment strategies, followed by non-U.S. equity (27%) and U.S. fixed income (25%).

Average Passive Allocation (as a % of total allocation to the asset class) Passively Managed Assets

10th Percentile 100% 100% 100% 25th Percentile 68% 43% 35%

Median 30% 8% 0% 75th Percentile 0% 0% 0% 90th Percentile 0% 0% 0%

Average 38% 27% 25% # of Observations 55 49 55


87%

83%

80%

75%

70%

68%

67%

52%

48%

48%

Global custody (safekeeping, asset servicing, and trade processing)

Online access

Monthly or daily valuation

Short-term cash management and cash sweep vehicle support

Income tax collection and tax reclaim capabilities

Plan fund investment accounting, reporting, and valuation

Class action processing

Foreign currency (FX execution)

Performance measurement

Proxy notification support

Small (<$1bn) 6.1 bps

Medium ($1-$3 bn)* 2.0 bps Large (>$3 bn)* 1.6 bps

0 bps

2 bps

4 bps

6 bps

8 bps

1998 2001 2004 2008 2012 2015

Exp

ense

s re

lativ

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tota

l fun

d


Average custody costs increased by 55% from 2012 to 2015, going from 2.2 bps to 3.4 bps. Factors affecting custody costs include sizes and types of mandates, custody services utilized, and servicing requirements, although a significant portion of these costs are fixed.

The custody cost differential between small and large funds is significant (4.5 bps), indicating that fund size matters a great deal. The stark rise in average custody costs for small firms is attributable to an upward trending readjustment of fee minimums by custody banks. In addition, large firms tend to participate in a greater offering of services provided by custody banks (e.g., cash management and securities lending), either as a cost offset or to generate additional revenue for the service providers, allowing for greater economies of scale.

The most popular custody services are highlighted to the right; 87% of respondents receive global custody services. The least popular services are managing company stock (3%) and reporting on environmental, social, and governance (ESG) factors (3%).

Average Custody Costs by Fund Size

Top Ten Most Popular Custody Services**

* For surveys produced prior to 2012, medium funds were defined as those with $1 to $10 billion in assets, and large funds as those

with more than $10 billion. ** Multiple responses were allowed.


6

6

2

4

1

1

3

4

5

22

4

4

2

3

1

1

8

12

3

27

10

8

5

8

2

1

9

29

21

60

0 20 40 60

U.S. Equity

Non-U.S. Equity

Global Equity

U.S. Fixed Income


Cash

Hedge Funds/FoF

Private Equity

Real Estate/REITs

Total # Managers


External Investment Managers

These charts display the average number of external investment managers employed across nine asset classes by fund size and fund type. Funds generally employ more external managers for private equity than other asset classes. On average, all survey respondents had seven external U.S. equity managers and five external U.S. fixed income managers.

Manager counts are skewed toward the high end in hedge funds, private equity, and real estate because the counts reflect funds that invest directly in partnerships as well as in funds-of-funds.

Average Number of External Investment Managers

6

5

4

5

2

1

4

13

12

39

8

8

1

7

1

1

6

15

6

28

5

6

3

3

2

1

10

15

7

34

0 45Public Corporate Endowments/Foundations

By Fund Size By Fund Type


$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Chief ExecutiveOfficer

Chief FinancialOfficer

Chief InvestmentOfficer

Chief OperatingOfficer

Director

Compensation

These charts illustrate the distribution of total annual compensation across a number of positions at U.S. funds and trusts. The figures include base salary plus bonus and/or non-cash compensation, where applicable. Base salaries generally dictate total pay levels at fund sponsor organizations, although cash bonuses and non-cash compensation are part of total pay for around 39% of employees captured in the survey.

– 32% of executive-level employees received a bonus; the average bonus across all roles was $142,000

– 23% of executive roles received non-cash compensation including profit-sharing; the average non cash-compensation across all roles was $143,514

– 43% of executive employees received either incentive compensation/a bonus or non-cash compensation

– 13% received both incentive pay/bonus and non-cash compensation

Total 2015 Compensation by Function – Executive Level*

*Note the small sample size. Compensation data is primarily for public funds at the: executive level, 47% public, 19% corporate, and 34% other (endowments/foundations, Taft-Hartley plans, and other fund types).

10th Percentile 286,000 388,500 664,000 284,847 494,600 25th Percentile 254,500 233,810 489,070 284,303 261,500

Median 185,000 201,000 304,000 200,450 240,000 75th Percentile 150,500 122,450 163,976 107,986 171,120 90th Percentile 140,000 112,388 128,000 91,941 162,843

Average 241,432 231,520 382,302 191,839 295,989 # of Observations 11 7* 19 4* 5*


$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Officer/Director/Manager

InvestmentAnalyst

InvestmentAdministration

Manager

AdministrationAnalyst

Compensation (continued)

These charts illustrate the distribution of total annual compensation across a number of investment management and investment administrative positions. The figures include base salary plus bonus and/or non-cash compensation, where applicable.

Investment management includes those who manage investments internally and are the only positions that specialize in certain asset classes. Asset class specification breakdown for investment management roles were as follows: 27% fixed income, 23% private equity, 14% alternatives, 18% equity, 5% risk, 5% real estate, 5% hedge funds and 5% covered all. All those that specified alternatives salaries were above median. Employees with investment administration roles include performance analysis and reporting duties, while benefits administration (on the following page) manages enrollment, benefits determination, and payments, for example.

– 58% of investment management roles received a bonus; average bonus amount was $40,312

– Investment management employees had an average of 11 years of experience

Total 2015 Compensation by Function – Investment Management/Administration

* Note the small sample size. Compensation data is primarily for public funds in investment management roles: 52% public, 16% corporate and 32% other (endowments/foundations, Taft-Hartley plans, and other fund types); investment administration, 56% public, 22% corporate, and 25% other.

10th Percentile $290,972 $91,440 $119,000 $78,869 25th Percentile $260,270 $82,160 $106,000 $77,172

Median $203,707 $77,500 $87,500 $63,936 75th Percentile $160,779 $65,850 $69,750 $61,500 90th Percentile $146,548 $55,400 $65,500 $58,510

Average $210,693 $74,780 $90,667 $66,695 # of Observations 18 6* 6** 12


$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Benefits Manager Benefits Analyst Selecting Manager/Supervisor**

Selecting Analyst

Compensation (continued)

These charts illustrate the distribution of total annual compensation across several positions in benefits administration and selecting and/or supervising external investment managers. The figures include base salary plus bonus and/or non-cash compensation, where applicable.

– Only 7% (1 respondent) of benefits administration employees received a bonus or incentive-based compensation (0% received non-cash compensation)

– 42% of selecting/supervising roles received a bonus or incentive-based compensation: the average bonus was $44,183

– 15% of selecting/supervising roles received non-cash compensation

Total 2015 Compensation by Function – Benefits and Selecting and/or Supervising External Investment Managers

* Note the small sample size. ** Asset class breakdown for selecting/supervising roles: 26% private equity, 13% hedge funds, 9% risk, 9% real estate, 9% equity, 9%

alternatives, 4% real assets, 4% fixed income and 4% capital markets. The remaining 13% said they covered all asset classes. Compensation data is primarily for public funds: benefits administration, 73% public, 13% corporate; selecting/supervising, 33% public, 44% corporate. The remaining percentages reflect other funds types (endowments/foundations, Taft-Hartley plans, etc.).

10th Percentile $185,373 $75,000 $309,392 $96,750 25th Percentile $131,250 $70,000 $260,941 $86,625

Median $91,667 $64,000 $198,000 $77,500 75th Percentile $68,250 $55,000 $142,000 $74,750 90th Percentile $61,200 $49,600 $96,400 $70,510

Average $114,531 $62,571 $214,329 $80,689 # of Observations 8* 7* 28 16


3.5 1.9

11.8 10.8

2.8 1.9 1.6 2.5

15.3

8.1

6.0 3.3

Small(<$1 bn)

Medium($1 to $3 bn)

Large(>$3 bn)


Total # of dedicated fund staff Total # of non-dedicated fund staff

Staffing

Fund size and type influence the total number of staff overseeing the fund or trust. Not surprisingly, the largest funds employ the greatest number of staff: 15.3 dedicated employees (those that have few, if any, responsibilities beyond fund management) and 11.8 non-dedicated employees (that also have substantial responsibilities beyond the fund’s management), for a total of 27.1, on average. Small and medium funds generally have a comparable number of total employees, though small funds have fewer dedicated staff members.

Public funds had the greatest number of staff, employing more than twice the average number of employees as their corporate funds and endowments/foundations. To the same point, corporate funds employed more than twice as many dedicated fund staff members as endowments/foundations.

Average Staff Count by Fund Size and Fund Type

Total Respondent Group Distributions Total # of dedicated

fund staff Total # of non-dedicated

fund staff Total staff 10th Percentile 13.5 10.7 23.5

25th Percentile 7.0 3.0 9.8

Median 2.0 1.0 4.5



Average 5.9 5.5 11.4

# of Observations 54 54 54

5.1 4.4

27.1

5.2 8.8

18.9

Total fund staff shown above bar


39%

50%

11%

0%

20%

40%

60%

80%

100%

1998 2001 2004 2008 2012 2015

Other*

Investment Committee

Board of Directors/Trustees

Oversight

Nearly all survey respondents are “governed” by a board of directors/trustees and/or investment committee as the primary decision-making body. More respondents have an investment committee (50%) that controls the fund versus a board of directors/trustees (39%) for the first time since 2001. Change in fund/trust oversight bodies over time is more reflective of the survey respondents’ fund types than specific trends in oversight. Public funds typically have boards of directors/trustees as the primary investment decision-making body (90%), whereas corporate funds usually have an investment committee oversee the fund (72%). Endowments/foundations’ oversight body of choice was approximately 70% investment committee, as well.

Prevalence of “Other” primary oversight bodies (11%) increased relative to previous years and include a benefit plans advisory committee, Finance Committee Board of Directors, and staff with oversight from board or committee.

Sixty-five percent of funds/trusts with boards also have investment committees to provide additional fiduciary oversight.

Who controls these funds?

If your fund/trust has a board of directors/trustees, is there also an investment committee (or similarly structured committee) that handles regular fiduciary duties?

Yes 65%

No 35%

* Other: a benefit plans advisory committee, Finance Committee Board of Directors, and staff with oversight from board or committee.


From within organization 20%

From outside organization 80%

0

5

10

15

20

25

2008 2012 2015

Oversight – Board of Directors/Trustees

Looking at funds/trusts with boards of directors/trustees, the data reveal an average of 14 board members, up from 10 in 2012.

Board size has remained consistent over the past 12 years. More than half (80%) of these decision makers are from outside the organization, up from 70% in 2012.

– There is a negative correlation between fund size and number of board members

– 96% of board members are voting members, on average

– Fund sponsors held an average of 7 board meetings per year in 2015, down from 8 in 2012 and 11 in 2008

– 25% of board members are compensated for their efforts, down from 32% in 2012

– $16,228 is the average annual pay for those who receive compensation, up from $15,140 in 2012

Total Number of Board Members

Yes 79%

Yes 69%

No 21%

No 31%

Outside board members

Chairman

Board Makeup (median responses)

Do you consider your outside board members and chairman to be independent?

10th Percentile 13 13 24 25th Percentile 10 12 14

Median 9 9 9 75th Percentile 7 7 7 90th Percentile 6 7 5

Average 9 10 14 # of Observations 32 34 40


From within organization 38%

From outside organization 62%

0

2

4

6

8

10

2008 2012 2015

Oversight – Investment Committee

For funds with investment committees, 62% of the members are from outside the organization, consistent with 2012.

When the committee chairman is from within the organization, it is most frequently the CFO (25%). Other internal titles that chair the committee include CIO, treasurer, president, and director. Elected employee members are also vice chairmen, as is one deputy CIO.

Internal committee members are most frequently senior employees from treasury, human resources, and executive-level positions (e.g., CEO, CFO, etc.).

Fifteen percent of investment committee members are compensated explicitly for their efforts on the committee (i.e., in addition to annual compensation for those from within the organization), up from 6% in 2012. The dollar amount of compensation is rising, as well. When they were paid, committee members received an average of $3,640 in 2015 (based on a relatively small sample size of five data points), up from $1,050 in 2012.

Total Number of Investment Committee Members

Investment Committee Makeup (median responses)

Investment Committee Quick Facts

– 15% of committee members received compensation in 2015 vs. 6% in 2012

– When committee members are compensated, the median pay is $3,700 per year

– Average number of meetings per year: 4.8 in 2015 (vs. 8.0 in 2012)

10th Percentile 9 10 9 25th Percentile 8 9 8

Median 7 7 6 75th Percentile 5 5 5 90th Percentile 5 4 3

Average 7 7 6 # of Observations 34 34 42


0%

10%

20%

30%

40%

50%

60%

0 bps 100 bps 200 bps 300 bps

Per

cent

Alte

rnat

ives

Total Expenses

Correlations

The strongest positive correlation we found in our data on fund expenses is between the size of the fund and the total number of dedicated fund staff (+0.57, not shown). Another strongly positive correlation (featured to the right) is between the percentage allocation to alternatives and the subsequent total expenses of the fund (+0.40). Alternative managers usually charge higher investment management fees than the more traditional asset classes.

Negative correlations exist between the fund size and total investment compensation paid in basis points (-0.33, not shown), as well as the percentage of the fund managed passively and total fund expenses (-0.34).

Percentage of Fund Alternative Allocation to Total Fund Expenses (+0.40)

0%

20%

40%

60%

80%

100%

0 bps 100 bps 200 bps 300 bps 400 bps

Per

cent

pas

sive

ly m

anag

ed

Total Expenses

Percentage of Fund Passively Managed to Total Fund Expenses (-0.34)


Most Frequently Cited Cost Concerns

Consistent with sentiments expressed in the other four Cost of Doing Business Surveys that Callan has conducted over the past two decades, respondents’ greatest cost-related concern remains whether the performance of their actively managed funds is keeping pace with the level of fees charged. Market volatility and/or conditions ranked second.

Additional comments from survey respondents suggest organizations also have cost concerns regarding attracting and retaining talent.

Rank the relevance of the issues or concerns your fund/trust faces regarding cost. (0=not relevant, 6=very relevant)

5.0 4.5

3.8 3.4

3.0 2.9

Whether performance of actively managed funds is keeping pace with level of fees charged

Market volatility and/or conditions

Use of non-traditional investments driving up external management fees

Desire to control increasing administrative and operational expenses

Rising costs of retaining top fund management personnel

Plan’s median demographics and their impact on pension payroll payments


Methodology and Definitions

Methodology Callan emailed questionnaires to a broad sample of institutional fund sponsors in the U.S. (defined contribution plans are not represented in the survey sample). Most responses reflect data for the periods ending December 31, 2015 (91%), and the remaining respondents provided data with alternative year-end dates of 6/30/2015, 9/30/2015, 11/30/2015, and 2/29/2016. Data was collected in February and March of 2016. We compiled all responses in a database and supplemented them with qualitative analysis and industry information to yield the trends reported in this document.

Callan published similar, independent surveys in 1998, 2002, 2005, 2009, and 2013 to obtain a broad sampling of cost trends in the marketplace. Throughout this report we comment on relevant differences between the 2016 survey and previous surveys.

Definitions Alternative Investments (Alternatives): Includes private investment funds meeting the definition of an investment company, such as hedge funds, private equity funds, real estate funds, venture capital funds, commodity funds, offshore fund vehicles, fund-of-funds, and bank common/collective trust funds (excluding public market asset classes).

Fund/Trust: Tax-exempt and/or tax-qualified funds including multi-employer funds, endowments and foundations, corporate retirement funds, and public retirement funds.

Investment-Related Expenses: All expenses related to administering, operating, and/or managing fund assets. Included are custody expenses, external investment management fees, external advisor fees (e.g., accounting, legal, consulting), compensation, travel, and education costs for those professionals involved with administering, operating, and/or internally managing fund assets and other operating expenses. Benefits administration fees are not included.

Non-Investment Manager External Advisors: Fund/trust advisors from outside the organization that conduct performance monitoring and reporting, auditing, legal and account services, etc., such as consultants, actuaries, and other service providers.


About the Authors

Shane Blanton is a Senior Analyst in Callan's Published Research Group covering business analytics. He is responsible for data analysis and visualization to support Callan's research endeavors. In addition, he is responsible for measuring and benchmarking Callan's communications campaigns. Previously Shane was a member of the Analytical Solutions Group for three years, training Callan's clients to use PEP software.

Prior to joining Callan, Shane worked as an Account Manager for an IC packaging manufacturer, and also worked as a trading assistant to a proprietary options firm. Shane attended Carnegie Mellon University, where he earned a B.S. in Business Administration.

Anna S. West is a Senior Vice President dedicated to Callan's research and education initiatives. As Director of the Callan Institute and Co-Manager of the Published Research Group, she oversees the educational content presented at Callan Institute workshops and conferences. She also works with subject matter experts across Callan to produce white papers, surveys, charticles, and other research for investors. As chair of Callan's Environmental, Social, and Corporate Governance (ESG) Committee, Anna covers ESG trends and developments. Anna is also a member of Callan's Emerging and Minority, Women, or Disabled-owned Managers Committee and is chair of the Institute Advisory Committee. Anna joined Callan in 2006 and is a shareholder of the firm.

Prior to Callan, she worked for Vail Resorts, Inc. She is a member of Denver University's Department of Business Information and Analytics Advisory Board, where she aids in maintaining a curriculum that aligns with current industry needs and anticipates future trends.

Anna earned an MBA from the University of San Francisco and a BA in International Business and French from Washington University.


Disclosure

© 2016 Callan Associates Inc.

Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.

About Callan Callan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have empowered institu-tional clients with creative, customized investment solutions that are uniquely backed by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises on $2 trillion in total assets, which makes us among the largest independently owned investment consulting firms in the U.S. We use a client-focused consulting model to serve public and private pension plan sponsors, endowments, foundations, operating funds, smaller investment consult-ing firms, investment managers, and financial intermediaries. For more information, please visit www.callan.com.

About the Callan InstituteThe Callan Institute, established in 1980, is a source of continuing education for those in the institutional investment com-

munity. The Institute conducts conferences and workshops and provides published research, surveys, and newsletters.

The Institute strives to present the most timely and relevant research and education available so our clients and our as-

sociates stay abreast of important trends in the investments industry.

For more information about this report, please contact: Your Callan consultant or Anna West at [email protected]

© 2016 Callan Associates Inc.

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