callan’s 2017 investment management fee survey€¦ · callan’s 2017 investment management fee...

2017 Investment Management Fee SurveyU.S. Institutional Fund Sponsors and Investment Managers

CALLAN INSTITUTE

Survey

02017 Investment Management Fee SurveyKnowledge. Experience. Integrity.

Table of Contents

Executive Summary 1

Key Findings 2

Respondent Group Profile 4

Total Fund-Level Fees 6

Actual Fees by Asset Class Paid Over Time 8

Fee Revenue Allocation 9

Performance-Based Fees 10

Fee Reviews and Alterations 15

Fee Negotiations and Discounts 18

Top Fee Concerns 22

Published vs. Actual Fees by Asset Class 23

Appendix 43

1 2017 Investment Management Fee Survey Knowledge. Experience. Integrity.

Executive Summary

Overview and Methodology

Published and Actual Fee Distributions Methodology

Callan’s 2017 Investment Management Fee Survey—the seventh fee survey we have produced in 30 years—reports on institutional investment management fee payment practices and trends. The data in this report were gleaned from electronic questionnaires sent to a broad sample of U.S.-based institutional fund sponsors and investment management organizations, as well as from information in Callan’s proprietary database.

Respondents provided fee information for calendar year 2016 (specific dates varied by organization, but the majority were as of December 31, 2016), and perspective on fee practices for 2017.

Published fees were collected from Callan’s database of investment managers, which houses more than 1,600 strategies and for which fee data is self-reported. Published fee distributions are calculated according to the data points available for actual fees within a predetermined range per account size tier. The representative ranges of the actual fee account sizes were applied to the published fee schedules for strategies in the corresponding asset class, resulting in an apples-to-apples comparison of published and actual fees.

Actual fees were collected from two sources: via the questionnaire that fund sponsor participants completed, and via Callan’s database of fund sponsor clients. These two datasets were combined to create one sample for each asset class, which was then separated by account size before aggregate statistics were calculated.

Corrections were made to data on pages 9, 11, 12, 13, 27, 40, 41, and 43 of this report on March 21, 2018.


Callan’s 2017 Investment Management

Fee Survey reflects trends on 2016

fees for 59 U.S. funds and trusts and

279 investment management

organizations. This is the 30th

anniversary of the original publication.

Key Findings

Most frequently cited concern regarding fees:

Whether or not active managers are providing the value-added to justify the fees

15%Decrease in the use of performance-based fees among investment managers since 2014

25%Decrease in revenue allocated to bonuses for managers since 2014

69% Of fund sponsor assets actively managed, down from 84% in 1996

21%of investment managers plan to lower fees in 2017

36 bpspublic funds

68 bpsendowments/foundations

37 bpscorporate

funds

median total investment management fees paid

38 bps

Increase in allocation to alternatives since 2014

public funds 17%corporatefunds 17%

endowments/foundations 6%

Median investment management fees byasset class

Fixed Income 21 bpsU.S. Equity 34 bpsNon-U.S./Global 45 bpsAlternatives 90 bps


Key Findings: Total Fund-Level Fees

38 basis points was the median fee paid across the total fund in 2016

Endowment funds paid the most, public funds paid the least

Fund size influenced total investment management fees paid

Fund sponsors paid a median 38 basis points in investment management fees in 2016 across the total fund, unchanged relative to 2014. The range in fees paid across respondents increased from 2014 to 2016.

Endowments/foundations have paid the most in management fees over time: 60 bps in 2012, 55 bps in 2014, and 68 bps in 2016. Corporate funds (37 bps) paid slightly more than public funds (36 bps) in 2016 and remained stable from 2014 levels.

.

Smaller funds paid a premium for investment management relative to other fund sizes: funds with less than $1 billion in assets paid 65% more than medium funds ($1 billion to $10 billion in assets) and 91% more than the largest funds (greater than $100 billion in assets).


Public 44%

Corporate 34%

Endowment/ Foundation 20%

Other 2%

Respondent Group Profile: Fund Sponsors

< $1bn 29%

$1bn to $10bn 41%> $10bn to $100bn 22%

> $100bn8%

Fund Sponsor Respondents by Type Fund Sponsor Respondents by Assets

The majority of respondents were public funds (26), followed by corporate (20), and endowments/foundations (12).

Fifty-nine asset owners representing more than $1.1 trillion in assets responded to Callan’s 2017 Investment Management Fee Survey. The fund sponsor respondent group was skewed toward larger funds when compared to the U.S. fund sponsor marketplace as a whole, as represented by Standard & Poor’s Money Market Directories 2016 Database, where around 81% of funds have less than $1 billion in assets. The majority of respondent funds’ assets were actively managed (69% on average). While several funds managed a sizable portion of their assets internally, on average 87% of assets were managed externally.

59 Fund sponsors $1.1 trillion in total assets


Respondent Group Profile: Investment Managers

Investment Manager Respondents by Firm AUM(as of 12/31/2016)

Investment management organizations with $13.9 trillion in assets under management responded to the survey

Survey results also incorporated responses from 279 investment management organizations, supplemented by Callan’s Investment Manager Database of more than 1,600 firms. Respondent firms were diversified by size: 41% had $5 billion or less in AUM; 32% had between $5.1 billion and $30 billion AUM; and 27% managed more than $30 billion in assets.

< $1 bn15%

$1bn to $3bn18%

> $3bn to $5bn8%

> $5bn to $10bn18%

> $10bn to $30bn14%

> $30bn to $100bn13%

> $100 bn14%279

Investment manager respondents

$13.9 trillionTotal assets under management (AUM)


42%

36%

20%

2%

Quarter end

Varies by manager

Month end

Quarter beginning

Total Fund-Level Fees

* Multiple responses allowed

Investment Management FeesAcross Total Fund (bps)

When market values are calculated (for fee base)*

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

2012 2014 2016

10th percentile 76 67 72


Median 36 41 38



Average 41 45 46

# of observations 26 26 26

42%Use quarter-end market values for fee calculations38 bps

Median investment management fees paid by fund sponsors in 2016


20 bps

30 bps

40 bps

50 bps

60 bps

70 bps

2012 2014 2016

< $1bn

$1bn < $10bn

$10bn < $50bn

20 bps

30 bps

40 bps

50 bps

60 bps

70 bps

2012 2014 2016

Public

Corporate

Endowment/Foundations

Total Fund-Level Fees: by Fund Type and Size

Median Total Investment Management Fees Paid (by fund type)

Median Total Investment Management Fees Paid (by fund size)

68 bpsMedian investment management fees paid by Endowments/Foundations in 2016; up 24% over 2014 (55 bps)

17%Jump in total fees from 2014 to 2016 for the smallest funds from 52 bps to 61 bps


0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

120 bps

140 bps

160 bps

U.S. Equity Non-U.S./Global Equity Fixed Income Alternatives

2012 2014 2016 2012 2014 2016 2012 2014 2016 2012 2014 2016

10th percentile 63 58 65 70 71 76 38 35 33 145 154 132

25th percentile 57 49 55 56 54 62 31 26 29 122 136 117

Median 43 38 34 39 40 45 19 19 21 85 91 90

75th percentile 26 24 25 25 24 33 13 15 18 71 67 71

90th percentile 18 16 15 18 19 19 6 8 11 64 50 53

Average 42 38 38 42 44 47 21 21 23 96 105 92

# of observations 22 23 31 21 24 30 23 25 31 22 25 24

Actual Fees by Asset Class Paid Over Time

Source: Fund Sponsor questionnaire responses

Actual Fees by Asset Class (basis points as a percent of total asset class value)

U.S. equity and non-U.S./global equity had the most dramatic movements from 2014 to 2016, with U.S. equity dropping 4 bps at the median and non-U.S./global rising 5 bps.

Fixed income and alternatives held relatively steady over the past two years at around 20 bps and 90 bps, respectively.


Fee Revenue Allocation

50%

50%

48%

50%

67%

60%

53%

63%

47%

73%

60%

76%

86%

20%

24%

21%

15%

15%

13%

23%

15%

27%

16%

18%

19%

8%

30%

26%

31%

35%

19%

27%

24%

23%

26%

12%

23%

5%

7%

U.S. Large Cap Equity

U.S. Mid Cap Equity

U.S. Small Cap Equity

Non-U.S. Equity

Global Equity

Emerging Market Equity

Core Fixed Income

Core Plus Fixed Income

High Yield Fixed Income

Non-U.S. Fixed Income

Real Estate

Hedge Fund-of-Funds

Commodity Funds

Break-even Base to Cover CostsBonus to Manager/TeamProfit Margin to Firm

* Average responses.

Number of Respondents

88

55

62

32

37

29

51

25

20

17

18

21

16

+ + = Total Firm Revenue

Allocations to Fee Revenues*

18% Investment managers’ allocation to bonuses as a percent of revenue in 2016, down from 24% in 2014.

The most dramatic change was seen in non-U.S. fixed income (down 19%), followed by hedge funds and global equity (down 13%, each).

The percentage of revenue allocated to cover the cost of operations increased dramatically, from 42% to 60%, on average.

Profit margin as a percentage of revenue decreased from 34% in 2014 to 22% in 2016, on average.


Performance-Based Fees

We present average responses to questions about performance-based fee usage among both fund sponsors and investment managers.

We present data collected for 2016 alongside answers to the same questions posed in the previous years Callan produced this survey.

About the same number of fund sponsors reported paying performance-based fees for at least one account in 2016 (56%) as in 2014 (55%). This was on par with the 59% in 2009. The asset allocations of the respondent groups influenced this figure, as exposure to alternatives—including hedge funds, hedge fund-of-funds, private equity, and real estate—accounted for much of the use in performance-based fee structures.

The percentage of investment management firms that offered performance-based fees dropped the most since the question was asked in our survey, to 64% in 2016 from 75% in 2014. This was more in line with historical observations (64% in 2009, and 65% in 2011). However, the use of these fee arrangements increased over the last two years: 21% of managers’ clients paid performance-based fees in 2016, up from 17% in 2014.


0%

20%

40%

60%

80%

2009 2011 2014 2016

Investment manager respondents thatoffered performance-based feearrangements

Firm's clients that paid performance-based fees

New business opportunities that haveasked about the availability ofperformance-based fees

0%

20%

40%

60%

80%

2009 2011 2014 2016

Fund sponsor respondents that paidperformance-based fees

Fund's managers that are paidperformance-based fees

Mandates awarded in the previous 18months that use performance-basedfees

Performance-Based Fees: Usage

Fund Sponsors

Investment Managers

56% of fund sponsors reported paying performance-based fees for at least one account in 2016.

– 55% in 2014

– 35% in 2011

– 59% in 2009

Exposure to alternatives—including hedge funds, hedge fund-of-funds, private equity, and real estate—accounts for much of the use in performance-based fee structures.

64% of investment management firms offered performance-based fees in 2016.

– 75% in 2014

– 65% in 2011

– 64% in 2009

21% of managers’ clients paid performance-based fees in 2016, up from 17% in 2014.


Performance-Based Fees: Mechanics

* Multiple responses were allowed

Source of valuation for calculating performance-based fees*

67%

56%

56% 20%

45% 50%

4% 10%

Custodian Manager Fund Sponsor Other

Managers Fund Sponsors

11%

5%

58%

26%

7%

20%

35%

41%

Inception-to-date results annualized to calculate fees untila longer track record is established

Other

Fees handled according to the published fee scheduleduring the first year

(or other established measurement period)

Fund sponsor and investment manager negotiated a feeschedule for the start-up period

Managers Fund Sponsors

How fees were handled during the start-up period*

50% of fund sponsor respondents used the manager as the source of valuation for calculating fees; 45% used the custodian to value assets

67% of managers relied on custodian to value assets

During the fund’s start-up period (before the performance measurement period has passed) managers and fund sponsors assessed fees in multiple ways.

Managers reported that fees were most often negotiated in the start-up period, while fund sponsors indicated that pro-rating fees was the most frequent method.


60%

54%

38%

29%

20%

8%

20%

31%

13%

18%

20%

14%

8%

8%

7%

20%

25%

35%

20%

8%

14%

8%

17%

20%

30%

18%

17%

9%

8%

8%

13%

6%

21%

15%

13%

8%

18%

8%

13%

12%

40%

83%

50%

69%

75%

60%

70%

82%

75%

73%

92%

Hedge Funds

Private Equity

Infrastructure

Real Estate

Hedge Fund-of-Funds


Non-U.S. Equity


Core Fixed Income




U.S. Mid Cap Equity

Global Equity


Always Frequently Sometimes Rarely Never

Performance-Based Fees: Top Asset Classes – Fund Sponsors

Frequency of performance-based fee arrangements by asset class

* Note the small number of respondents

Number of Respondents*

10

13

8*

17

5

12

14

13

12

15

10

11

12

11

13

Consistent with previous survey findings, performance based-fee arrangements were most commonly used by alternative investment strategies. Managers reported little use of these fee arrangements with traditional, public market mandates.


Performance-Based Fees: Top Asset Classes – Investment Managers

57%

49%

39%

25%

20%

18%

9%

8%

8%

8%

7%

6%

5%

4%

2%

1%

1%

0%

0%

Hedge Funds

Private Equity

Real Estate

Hedge Fund-of-Funds

Infrastructure

Absolute Return

Commodity Funds

U.S. Mid Cap Equity



Global Equity


Core Fixed Income

Non-U.S. Equity




Balanced

Money Market

Source: Investment manager questionnaire responses


27

15

34

14

10

15

11

46

39

60

49

66

36

39

23

27

31

26

16

Percentage of clients that paid performance-based fees for each asset class managed

Investment managers indicatedthat the highest percentage of their clients pay performance-based fees for alternatives, but at a lower rate in 2016, compared to 2014. 57% of hedge fund clients paid performance-based fees, down from 75% in 2014.


16%

71%

100%

13%

None

Peers

Consultants

Other

As needed 39%

31% AnnuallyQuarterly

11%

Between two and five years 7%

When a new fund/strategy is established5%

No published fee schedule3%

Other3%

Investment Manager Published Fee Reviews

* Multiple responses were allowed

How often the published fee schedule is reviewed Industry sources used to evaluate fees*

39%As needed

100% Turn to consultants when reviewing fees


0%

20%

40%

60%

80%

100%

2014 2015 2016 2017

No changes

Change breakpoints

Lower fee minimums

Raise fee minimums

Lower fees

Raise fees

Between two and 5 years 9%

When a new fund/product is established 7%

More than every five years 7%

Never 5%

Other 5%

Annually 2%

Investment Manager Published Fee Alterations

Frequency of changes to published fee schedule

Changes to published fee schedule

65% As needed

Almost two-thirds of investment management respondent firms altered their published fee schedules on an “as needed” basis. Only 2% reported making changes annually, similar to 2014 results (3%). Fivepercent never change published feeschedules, again on par with 2014 (6%).

Looking at changes over time, the majority of investment management firms reported making no changes to published fees in each year examined. When firms did makechanges, lowering fees was the most common action. In 2017, 21% of managers plan to lower fees, representing a modest downtick inactivity relative to 2016 (24%).


100%

71%

13%

16%

Consultant(s)

Peers

Other

None

Fund Sponsor Frequency of Fee Reviews


Frequency of fee review

Sources used for fee comparisons when evaluating fees*

Quarterly 12%

Biannually 5%

Annually 48%

Every two years 2%

Every three years 10%

Every five years 10%

More than every five years 2%

Never 2%

Other 10%

48% Annually

100% Turn to consultants when reviewing fees

61% Saw no change in frequency of fee negotiation

0%

20%

40%

60%

80%

100%

2014 2015 2016

Fee negotiations increased

Fee negotiations decreased

Fee negotiations did not change

Fund sponsor changes in fee negotiations over time


Fee Negotiation Practices Among Investment Managers

83%Of investment managers negotiated fees,down from 91% in 2014

98%Negotiated fees with New clients

With 48% of new clients, on average

76%Negotiated fees with Existing clients

With 15% of existing clients, on average

66%Negotiated fees for all mandates

8%

4%

4%

4%

5%

24%

17%

13%

17%

19%

52%

62%

59%

57%

59%

13%

16%

23%

15%

16%

2%

1%

2%

6%

1%

Public

Corporate

Endowment/Foundation

Multi-Employer

Other


Frequency of fee negotiations by client type

Public funds most frequently negotiated fees as reported by investment managers; endowments/foundations typically negotiated fees the least.


25%

25%

25%

23%

20%

20%

20%

19%

18%

17%

15%

13%

12%

12%

11%

11%

17%

13%

13%

18%

15%

12%

12%

19%

14%

11%

31%

13%

18%

12%

22%

17%

33%

38%

25%

36%

35%

48%

44%

31%

27%

44%

23%

46%

41%

53%

44%

56%

8%

13%

19%

14%

15%

16%

16%

25%

23%

22%

23%

17%

18%

18%

11%

11%

17%

13%

19%

9%

15%

4%

8%

6%

18%

6%

8%

13%

12%

6%

11%

6%

Hedge Funds

Hedge Fund-of-Funds

Private Equity




Non-U.S. Equity


Real Estate

U.S. Mid Cap Equity

Infrastructure

Core Fixed Income

Global Equity


Commodity Funds



Fee Negotiation Practices Among Fund Sponsors

Frequency of fee negotiations by asset class

* Note the small number of respondents


12

8*

16

22

20

25

25

16

22

18

13

24

17

17

9*

18

Alternatives top the list of strategies where fee negotiations occur most frequently


Primary Discounts Applied to Multi-Mandate Portfolios

31%

27%

22%

16%

8%

2%

2%

Other

Discounts applied to sum of all fees

No current clients with multiple mandates

No discounts given

First product funded changed first*

Most expensive product changed first*

Highest funded product changed first*

Indicate the fee structure(s) you have in place for clients with multiple mandates

* Next product changed as incremental funding level. Multiple responses allowed.

“Other” responses include:

“We utilize a tiered fee schedule based on the combined mandates' assets”

“Typically no discounts given but will depend on asset size”

“Accounts may be aggregated but only within the same investment team (typically the same strategy)”


Fee Negotiation Practices: Most Favored Nation


77%have most favored nation (MFN) clauses in place with any clients

With 30% of clients, on average

76%

17%

11%

7%

2%

Case-by-case basis with clientsthat inquire about MFN clause

Other

Based on fund size

Based on fund type

Based on length of relationship

Motivating Factor*

70%67%

40%

36%

34%

16%

15%

15%

11%

11%

By investment size

By strategy type

By vehicle type

By product type

By fund type

Other

By domicile

By fund size

By tax status (exempt or not)

By length of relationship

Classification for “nations,” or groups of like clients*MFN clauses generally dictate that an investment manager will give a fund sponsor investor the lowest fee available to other comparable investors


Ensuring that the fees paid for the fund are competitive with comparable offerings36%

How to best benchmark fees against peers and what is available in the marketplace 13%

Other 3%

Whether active managers are providing the value-added to justify the fees

Top Fee Concerns

49%

Fund sponsor organizations’ biggest concerns regarding fees


Published versus Actual Fees

The following pages report on published versus actual fee data, when available, on 20 different asset classes. Published (or standard) fee information for most asset classes is sourced from Callan’s investment manager database, where laddered or sliding scales are applied to account sizes.

Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. Actual fees differ from published fees to varying degrees, depending on the asset class.

In Appendix I we include published fee distributions for 18 additional asset classes and sub-asset classes, including large cap core, value, and growth equities and others.

Active


U.S. Small / Mid Cap Equity

Non-U.S. Equity

Non-U.S. Small Cap Equity

Global Equity


Core Fixed Income



Long Duration Fixed Income

Global Fixed Income / Emerging Market Debt

Passive


U.S. Smid Cap Equity

Non-U.S. Equity

U.S. Broad Market Fixed Income

Alternatives

Real Estate

Private Equity

Hedge Fund-of-Funds

Direct Hedge Funds

Note that differences between actual and published fees for all asset classes may reflect one or more of several factors:– How much the published fee schedule is negotiated– Differences in the actual and published fee database participants– Hiring practices of individual fund sponsors (e.g., choosing lower fee products)– Bundling of services when fund sponsor uses multiple manager products or services– Institutional demand and product availability

Asset Class Coverage


Actual versus Published Fees: Active U.S. Large Cap Equity

Published (or standard) fee information for most asset classes is sourced from Callan’s Investment Manager Database where laddered or sliding scales are applied to account sizes.Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points.

– In active U.S. large cap equity, more of the investment activity at the institutional level is geared toward manager replacement or mandate replacement. Callan observes fewer investors making new allocations in the space.

– We’ve observed substantial capital outflows since the Global Financial Crisis in large cap equity, with many funds transitioning to passive mandates, putting downward pressure on investment fees.

– Clearly account size matters, as the median actual fee paid is halved from 50 bps for the smallest accounts to 25 bps for the largest accounts.

– We note that the high end of the fee spectrum across account sizes tended to be value and growth products, while those at the low end tended to be core.

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

2016 published fees 2016 actual fees Average fees

Active U.S. Large Cap Equity Fees (basis points) by Account Size

<= $50mm $50 to $150mm $150 to $300mm $300 to $600mm $600mm to $4bn

10th percentile 88 75 81 60 78 54 77 44 75 39

25th percentile 74 61 63 52 59 41 56 37 55 34

Median 60 50 52 41 48 30 44 29 41 25

75th percentile 50 35 44 31 40 23 36 24 32 21

90th percentile 39 23 34 21 30 17 27 17 25 13

Average 62 50 55 41 52 33 49 31 47 28

Count 1138 103 1138 69 1138 61 1138 48 1138 34


Actual versus Published Fees: Active U.S. Small/Mid Cap Equity


– Smid cap fees commanded a premium of around 20 to 30 bps over large cap for several reasons:– The smid cap market space is less

efficient, creating greater potential for alpha generation.

– Smid cap managers encounter capacity constraints that their large cap counterparts do not, and hence are able to maintain higher fee levels.

– Mandate size is less important for determining smid cap fees than it is for large cap fees; the largest mandate sizes in smid pay around 25% less than the smallest accounts, compared to a 50% discount in large cap.

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

120 bps

Active U.S. Small/Mid Cap Fees (basis points) by Account Size


<= $50mm $50 to $150mm $150 to $300mm $300mm to $1bn

10th percentile 100 100 100 100 100 92 100 73

25th percentile 100 96 91 87 88 75 86 66

Median 89 75 80 76 76 65 75 56

75th percentile 80 51 72 58 67 54 63 51

90th percentile 68 50 61 49 56 46 52 44

Average 88 75 81 73 78 66 76 59

Count 879 121 879 88 879 38 879 27


Actual versus Published Fees: Active Non-U.S. Equity


– Non-U.S. equity fees were strongly correlated with mandate size, with the largest accounts paying around 40% less than the smallest accounts in actual fees.

– For published fees, the discount at the median for the largest accounts was closer to 30% over the smallest accounts.

– We observe a much wider dispersion for actual fees for mandates less than $150mm—in the range of 40 to 50 bps—than for the largest mandates (closer to 20 bps). Published fee ranges, however, are consistent across mandate sizes at around 40 to 50 bps.

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

Active Non-U.S. Equity Fees (basis points) by Account Size

<= $50mm $50 to $150mm $150 to $300mm $300 to $600mm $600mm to $3bn

10th percentile 90 95 83 80 80 70 80 57 80 48

25th percentile 80 81 75 74 69 58 66 48 65 41

Median 74 66 65 65 59 49 55 41 52 38

75th percentile 65 56 55 55 49 45 45 33 42 32

90th percentile 47 45 43 40 39 40 35 24 31 25

Average 71 69 64 63 60 52 57 41 55 37

Count 642 112 642 77 642 53 642 58 642 34



Actual versus Published Fees: Active Non-U.S. Equity Small Cap

Published (or standard) fee information for most asset classes is sourced from Callan’s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points.

– Non-U.S. small cap mandates charged higher fees than large cap ones—around 15 bps higher for the smallest accounts and nearly 30 bps for the largest accounts, according to actual fee distributions.

– This is largely due to capacity constraints; the typical capacity for a non-U.S. small cap strategy is around $2 billion.

– Given the substantial research and operational expenses in small cap, published and actual fees overlap more frequently in this asset class.

– The narrow range of actual fees for the largest accounts is attributable to the fact that this is a relatively new asset class with fewer available products. Subsequently there are not as many manager searches and/or placements.

– However, fee negotiations are more likely available for investors in nascent products.

Active Non-U.S. Small Cap Equity Fees (basis points) by Account Size

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

120 bps

<= $150mm $150 to $900mm

10th percentile 115 99 110 84


Median 90 84 82 73



Average 91 81 85 71

Count 175 18 175 21



Actual versus Published Fees: Active Global Equity


– Compared to non-U.S. equity, global equity strategies charged actual fees around 10 bps lower for the smallest accounts and 5 bps lower for the largest accounts.

– Capacity for global equity is higher than non-U.S. equity, which can account for the lower fees across mandate sizes.

– Furthermore, investors with global exposure tend to have more assets under management, and hence the mandate sizes tend to be larger, enabling them to hit the lower end of the tiered published fee structure.

– Callan has observed an increase in search activity for global equity in the last several years.

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

Active Global Equity Fees (basis points) by Account Size

<= $100mm $100 to $300mm $300mm to $2bn

10th percentile 100 90 92 66 90 61

25th percentile 83 73 75 58 71 55

Median 70 56 61 43 55 43

75th percentile 60 45 51 37 45 39

90th percentile 50 28 42 32 35 24

Average 71 59 64 47 59 44

Count 620 19 620 20 620 28



Actual versus Published Fees: Active Emerging Market Equity


– Fees have come down on the top end in the past decade as emerging market equities have become more efficient.

– Actual fees for the smallest accounts were around 120 bps at the 10th

percentile in 2011, and 95 bps at the median, according to Callan’s historical survey.

– Actual fees have also come down for the largest accounts relative to 2011, from a maximum of 78 bps at the 10th

percentile and 66 bps at the median to 66 and 59, respectively, in 2016.

– Published fees have correspondingly fallen around 10 bps at the median across account sizes over the past five years.

– A recent spate of lackluster performance has also decreased demand for mandates in this space.

– Emerging market equities have become easier to trade. We are also seeing more transparency around governance and other traditional barriers to investment.

Active Emerging Market Equity Fees (basis points) by Account Size

0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

120 bps

<= $100mm $100 to $300mm $300 to $900mm

10th percentile 120 101 116 110 113 66

25th percentile 100 93 95 91 91 64

Median 90 85 85 73 79 59

75th percentile 80 69 74 67 68 46

90th percentile 65 47 58 47 53 36

Average 91 81 85 77 81 55

Count 419 50 419 18 419 27



0 bps

10 bps

20 bps

30 bps

40 bps

Actual versus Published Fees: Active Core Fixed Income


– Core fixed income is an asset class in which Callan has observed a lot of fee negotiation. Many investors view it akin to a commodity.

– Core bond fees have a relatively small relation to mandate size; margins have tightened over time and pricing competition has increased for smaller mandates.

– Actual fees paid have decreased around 5 bps at the median for the smallest accounts compared to 2011, while the median published fee was consistent with five years before.

– For the largest accounts the opposite is true; the median published fee fell by 5 bps but the median actual fee held steady. However, the overall range of fees fell for the highest accounts by about 5 bps during this period.

Active Core Fixed Income Fees (basis points) by Account Size



10th percentile 37 29 31 25 30 19 30 16

25th percentile 30 25 27 22 24 17 23 15

Median 28 19 23 19 21 15 20 13

75th percentile 25 15 21 15 18 14 16 11

90th percentile 22 12 18 13 15 13 13 11

Average 30 20 25 20 22 16 21 14

Count 253 73 253 39 253 26 253 12


Actual versus Published Fees: Active Core Plus Fixed Income


– The smallest accounts charge 5 bps more than core in published fees and 12 bps more in actual fees at the median; the premium is more muted for the largest accounts at 3 bps and 2 bps for published and actual fees, respectively.

– Compared to 2014, when Callan first began collecting fee data for core plus specifically, fees have actually crept up by a few basis points at the median for the smallest and largest accounts.

0 bps

10 bps

20 bps

30 bps

40 bps

50 bps

Active Core Plus Fixed Income Fees (basis points) by Account Size



10th percentile 48 48 42 28 41 26 41 26

25th percentile 38 45 33 27 31 25 31 19

Median 33 31 28 24 25 22 23 15

75th percentile 30 26 25 19 22 19 21 13

90th percentile 27 22 23 16 19 15 17 11

Average 36 37 32 23 29 21 28 19

Count 163 44 163 18 163 12 163 14


0 bps

20 bps

40 bps

60 bps

80 bps

Actual versus Published Fees: Active High Yield Fixed Income


– High yield is a more research-intensive area of fixed income, hence there is more opportunity to add value through security selection.

– High yield mandates charged a premium relative to core plus fixed income: median published and actuals fees were around 20 bps higher across both small and large account sizes.

– Fees remained relatively unchanged compared to 2014, when Callan last collected robust data on this asset class.

– Investors tended to be larger plans with sizable allocations to diversify a broader fixed income portfolios.

Active High Yield Fixed Income Fees (basis points) by Account Size

<= $200mm $200mm to $2bn



Median 50 50 43 38



Average 52 48 46 36

Count 217 23 217 22



0 bps

10 bps

20 bps

30 bps

40 bps

Actual versus Published Fees: Active Long Duration Fixed Income


– This is the first year Callan has compared actual and published long duration fixed income fees in our survey.

– This sample includes a broad range of mandates such as multi-sector, credit, and customized strategies.

– Long duration strategies charge fees in the same range as core fixed income or a few basis points lower.

– Unlike other asset classes examined in this report, the discount for the largest account sizes over the smallest is modest at 5 bps at the median.

– Many long duration investors are implementing liability-driven investing plans with the goal of replacing equity risk with larger allocations to fixed income. Hence plan sponsors tend to make large, incremental allocations to this asset class as they move along a de-risking glide path.

Active Long Duration Fixed Income Fees (basis points) by Account Size

<= $100mm $100 to $300mm $300 to $900mm

10th percentile 30 27 26 25 25 20

25th percentile 28 25 23 21 21 20

Median 25 22 21 19 19 17

75th percentile 23 19 18 16 17 13

90th percentile 20 18 15 13 13 10

Average 25 22 20 18 19 16

Count 130 32 130 20 130 10



Actual versus Published Fees: Global Fixed Income and Emerging Market Debt


– Global fixed income and emerging market debt strategies generally have fees that fall between core plus fixed income and high yield.

– These asset classes spend more on regional research, hedging, and trading in local markets, leading to higher fees.

– Emerging market debt strategies also charge more because of liquidity concerns and custody arrangements.

– However, the largest accounts enjoy significant fee breaks, around 40% lower than the actual median fee for the smallest allocations.

Global Fixed Income and Emerging Market Debt Fees (basis points) by Account Size

0 bps

20 bps

40 bps

60 bps

80 bps

<= $100mm $100mm to $1bn



Median 40 43 31 26



Average 42 43 35 28

Count 173 22 173 17



– While active U.S. large cap equity has seen substantial outflows in the past decade, passive mandates have absorbed many of those assets.

– Index fees have come down substantially over the past 20 years: Callan’s 1997 Fee Survey revealed a median of 12 bps in published fees for the smallest accounts and 5 bps for the largest.

– Actual fees have shrunk as well, from a median of 15 bps for the smallest accounts and 5 bps for the largest to 4 bps and 1 bp, respectively.

Actual versus Published Fees: Passive U.S. Large Cap Equity


Passive U.S. Large Cap Equity Fees (basis points) by Account Size

0 bps

5 bps

10 bps

15 bps


<= $100mm $100 to $300mm $300mm to $1bn $1bn to $4bn

10th percentile 12 12 10 5 8 3 8 2

25th percentile 8 8 7 4 5 2 4 1

Median 6 4 5 3 4 2 3 1

75th percentile 5 3 4 2 3 1 2 1

90th percentile 4 2 3 2 2 1 2 1

Average 8 6 6 3 5 2 5 1

Count 119 66 119 22 119 27 119 21

3 bps Median actual -all account sizes

4 bps Average actual -all account sizes


Actual versus Published Fees: Passive U.S. Small/Mid Cap Equity


0 bps

5 bps

10 bps

15 bps

Passive U.S. Small/Mid Cap Equity Fees (basis points) All Account Sizes

Published Actual

$25mm to $2bn

10th percentile 9 8

25th percentile 7 8

Median 5 6

75th percentile 4 4

90th percentile 2 1

Average 5 6

Count 55 16





Actual versus Published Fees: Passive Non-U.S. Equity


Passive Non-U.S. Equity Fees (basis points) by Account Size

0 bps

5 bps

10 bps

15 bps

<= $100mm $100 to $600mm $600mm to $4bn

10th percentile 15 12 12 12 11 6

25th percentile 12 10 10 7 8 4

Median 10 7 8 6 7 2



Average 12 8 10 6 9 3

Count 40 39 40 18 40 20





Actual versus Published Fees: Passive U.S. Fixed Income


Passive U.S. Fixed Income Fees (basis points) by Account Size

0 bps

2 bps

4 bps

6 bps

8 bps

10 bps

<= $100mm $100 to $600mm $600mm to $4bn



Median 6 5 5 4 4 2



Average 8 5 6 4 5 3

Count 47 34 47 16 47 19





Actual versus Published Fees: Real Estate Core Open-Ended and Separate Accounts


0 bps

20 bps

40 bps

60 bps

80 bps

100 bps

120 bps

140 bps

160 bps

Real Estate Fees (basis points) by Account Size

<=$50mm $50 to $150mm $150mm to $2bn

10th percentile 150 117 150 107 150 91

25th percentile 110 110 100 100 100 85

Median 99 97 93 91 86 71

75th percentile 94 85 86 80 77 46

90th percentile 62 58 53 63 51 39

Average 100 93 96 88 91 67

Count 28 30 28 26 28 32





Actual Fees: Private Equity

Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. * Net asset value.

0 bps

50 bps

100 bps

150 bps

200 bps

Private Equity (basis points) All Account Sizes

Separate Accounts Fund-of-Funds

Limited Partnerships

$5mm to $600mm* $1mm to $2bn* $1mm to $8bn*



Median 41 87 95



Average 82 80 107

Count 21 19 25

87 bps Median actual - all account sizes*

80 bps Average actual - all account sizes*


Actual versus Published Fees: Hedge Fund-of-Funds

Published (or standard) fee information for most asset classes is sourced from Callan’s Investment Manager Database where laddered or sliding scales are applied to account sizes. Actual fees represent payments fund sponsors made in 2016 to their investment managers, report as a percentage of total account size in basis points.

0 bps

50 bps

100 bps

150 bps

Hedge Fund-of-Funds Fees (basis points)

Published Actual $5mm to $250mm

10th percentile 150 136


Median 104 99



Average 115 101

Count 84 14

only 21% Of respondents have a performance incentive fee

Those performance incentive fees range from 2% to 5%

99 bps Median actual - all account sizes

101 bps Average actual - all account sizes


Actual Fees: Hedge Funds

Actual fees represent payments fund sponsors made in 2016 to their investment managers, reported as a percentage of total account size in basis points. Note the small sample size.

0 bps

50 bps

100 bps

150 bps

200 bps

Hedge Funds (basis points) by Account Size

<= $50mm $50mm to $250mm $250mm to $1bn



Median 153 149 100



Average 159 146 106

Count 6* 12 4*




Appendix I: 2016 Published Fees for Additional Asset Classes

Large Cap Core Large Cap Growth Large Cap Value

$10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm

10th Percentile 75 75 67 63 61 60 80 77 75 68 65 61 80 77 70 62 60 54

25th Percentile 68 64 59 55 54 49 75 75 65 60 58 53 75 68 60 56 55 50

Median 55 55 50 48 45 43 66 64 59 55 53 48 65 60 55 51 49 44

75th Percentile 50 45 44 41 40 35 60 60 55 51 48 44 58 55 50 46 44 38

90th Percentile 39 36 35 34 33 31 55 54 50 47 45 38 50 47 43 37 34 29

Average 56 55 50 48 45 43 70 64 59 55 53 49 65 60 55 51 49 44

Member Count 61 61 61 61 61 61 74 74 74 74 74 74 70 70 70 70 70 70

Small Cap Core Small Cap Growth Small Cap Value


10th Percentile 100 100 96 91 89 85 100 100 100 100 100 100 100 100 100 100 100 100

25th Percentile 100 93 87 82 80 75 100 100 95 92 90 85 100 100 95 91 90 86

Median 85 85 80 77 75 69 100 97 89 83 80 76 100 95 88 85 83 79

75th Percentile 76 75 73 69 68 65 90 86 85 80 77 68 86 85 80 77 76 70

90th Percentile 62 62 58 57 55 51 80 76 75 70 68 61 77 76 76 72 69 62

Average 85 85 80 77 75 69 100 96 88 83 80 76 100 95 89 85 84 80

Member Count 52 52 52 52 52 52 60 60 60 60 60 60 52 52 52 52 52 52

All Cap Equity Micro Cap Equity Smid Cap Equity


10th Percentile 100 100 98 90 86 82 140 133 130 129 129 127 100 100 100 94 94 89

25th Percentile 89 87 82 79 77 70 125 125 125 125 125 125 100 98 90 87 85 80

Median 79 76 70 66 63 57 100 100 100 100 100 100 90 90 85 82 80 75

75th Percentile 65 64 58 55 53 47 100 100 95 92 90 85 85 85 78 76 74 66

90th Percentile 57 55 53 51 48 42 95 92 87 81 79 74 70 70 65 63 62 56

Average 78 73 69 66 63 59 100 100 100 100 100 100 90 90 85 82 80 75

Member Count 52 52 52 52 52 52 54 54 54 54 54 54 65 65 65 65 65 65


Appendix I: 2016 Published Fees for Additional Asset Classes

Unconstrained Defensive Government/Credit


10th Percentile 75 75 75 73 72 69 33 30 29 28 27 25 44 42 37 34 32 28

25th Percentile 60 60 60 60 60 60 25 25 25 23 23 20 35 35 33 30 29 25

Median 50 50 50 50 50 49 25 24 23 21 20 18 33 31 29 26 25 23

75th Percentile 40 40 40 40 40 39 20 20 18 18 18 15 30 27 25 23 23 19

90th Percentile 35 35 35 34 33 30 15 15 15 15 15 13 24 24 23 22 21 16

Average 50 50 50 50 50 49 25 24 23 21 20 18 33 31 29 26 25 23

Member Count 30 30 30 30 30 30 53 53 53 53 53 53 15 15 15 15 15 15

Intermediate TIPS Global Fixed Income


10th Percentile 37 35 35 32 30 27 151 151 151 151 151 151 50 49 47 47 47 44

25th Percentile 35 32 30 29 28 25 81 81 81 81 81 81 45 45 43 40 39 35

Median 30 30 28 27 25 23 45 45 45 45 45 45 38 38 38 35 35 30

75th Percentile 25 25 25 24 23 20 15 15 15 15 15 13 35 35 33 31 30 28

90th Percentile 25 24 22 20 19 16 7 7 7 7 7 6 30 30 30 28 27 24

Average 30 30 28 27 25 23 45 45 45 45 45 45 38 38 38 35 35 30

Member Count 51 51 51 51 51 51 33 33 33 33 33 33 54 54 54 54 54 54

Emerging Debt Active Cash

$10mm $25mm $50mm $75mm $100mm $200mm $10mm $25mm $50mm $75mm $100mm $200mm

10th Percentile 65 65 65 65 65 64 30 30 28 23 21 20

25th Percentile 60 60 60 60 60 58 20 20 20 20 20 18

Median 60 60 58 55 55 50 20 19 16 15 15 14

75th Percentile 50 50 50 50 49 45 15 15 15 15 15 13

90th Percentile 48 48 48 45 45 41 12 12 12 12 12 11

Average 60 60 58 55 55 50 20 19 16 15 15 14

Member Count 53 53 53 53 53 53 15 15 15 15 15 15


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.

About the Author


Disclosure

© 2017 Callan LLC

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 this publication. 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. Reference to or inclusion in this report of any product, service or entity should not be construed as a recommendation, approval, affiliation or

endorsement of such product, service or entity by Callan.

Callan is, and will be, the sole owner and copyright holder of all material prepared or developed by Callan. 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 Callan without permission. Callan’s 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 backed by proprietary research, exclusive data, and

ongoing education. Today, Callan advises on more than $2 trillion in total fund sponsor assets, which makes it among the

largest independently owned investment consulting firms in the U.S. Callan uses a client-focused consulting model to

serve pension and defined contribution plan sponsors, endowments, foundations, independent investment advisors, invest-

ment managers, and other asset owners. Callan has five offices throughout the U.S. 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 invest-ment community. 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 associates 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]

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