Agenda item

5c        Officers’ Report: Investment Manager Fees

5c.1     OO told members that this report had been requested at the last PB meeting. It should be noted that the issue of Investment Manager fees has been examined closely by the Pension Fund Investment Panel in past years. It was difficult to benchmark the performance of individual Investment Managers because the size and complexity of investments undertaken by any given Manager varied so much both between and within schemes. It was also important to understand Investment Manager fees in the context of the recent significant increases in fund value.

5c.2     DZ argued that ESPS Investment Manager performance was actually not all that impressive given the fact that markets had been rising for several years. The scheme should look for an Investment Manager willing to work for considerably less than those currently contracted. It must also be borne in mind that, whilst the annual fees of any single Investment Manager might not seem excessive, over the past 5 years the scheme had paid  £49.1m in fund manager fees; however, the fund value has increased by £744.1m over the same period. 

5c.3     TW asked how we compare with other schemes. OO replied that we benchmark well in terms of fees as a percentage of total assets managed. DZ noted that this may be so, but this may only indicate that all schemes are being exploited by Investment Managers. MK commented that it was important here to distinguish between different types of Investment Manager. Fees for actively managed funds are much higher than for passive investments. This is particularly so in the instance of absolute return funds, where the complexity of mitigating the inherent risks involved in investing in equities is held to justify high fees. MK also noted that Investment Managers typically claim that they do not charge Local Authorities any more than they would any other investor.

5c.4     TW asked what the likely result would be if the ESPS unilaterally announced that it intended to reduce the fees it paid to one or more Investment Managers. The Chair thought it would be unlikely that Managers would accept a fee reduction in this way, or that alternative Managers would offer to run similar funds for much lower fees. It would not be in Investment Managers’ interest to do so in response to a single scheme, so any action on behalf of Local Government schemes would need to be sector-wide.

5c.5     The Chair noted that Pension Committee would be discussing Investment Manager performance at its next meeting, particularly in relation to Lazard where it is anticipated that PC may opt to appoint an alternative Investment Manager or to allocate the assets currently managed by Lazard to other funds. Should the preferred course of action be to appoint a new Investment Manager, then there will be an opportunity to push for one which can offer significantly lower fees than those currently charged by Lazard.

5c.6     SM agreed that this represented some real opportunities. There was also the possibility that Investment Manager fees could be more intelligently linked to performance – e.g. performance above a benchmark rather than the current relatively crude system which tends to reward Investment Managers simply for operating in a rising market. The Chair noted that there was a risk in tying fees more closely to performance in that it might tend to encourage Managers to take imprudent investment risks in order to increase their fees.

5c.7     RESOLVED – that Pension Board recommends to Pension Committee that, should it opt to seek a new Investment Manager for the assets currently managed by Lazard, every effort should be made who can offer the scheme better value for money (i.e. charging lower fees than Lazard).