Managing the costs associated with running a fund or trust is paramount to the success of the fund, and it 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.
The results incorporate responses collected in early 2016 from 85 fund sponsors representing more than $400 billion in assets. The survey, reflecting results from 2015, includes responses from 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. Defined contribution plans are not included in this survey.
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.
