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Costs of Investment Management (Why it Matters (Increasing Alt Allocation,…
Costs of Investment Management
Understanding
Cost Components
Low Understanding
Median Cost 50 bps (NCSF)
Shows Wide Dispersion of Costs
50 - 130 bps range
More accurate at 100 - 15 bps
Details not understood
Performance Fee
Why it Matters
Cost are NOT fees
Transparency
Perf Reporting (Gross of Fee)
Increasing Alt Allocation
LP structure could have embedded/complex payments to GP
Cost reduces performance
Net of fee performance
More visible in falling markets
Reduces net performance
Pay for Alpha not Beta
Key deciding factor
Though, not cited as most important for manager selection
Structure of Costs
Size
Direct Relationship
Complexity
1B: 57% Alt
<25M: 10% Alts
Alt Allocation
Increase Fees
Indirect Relationship
Traditional Allocation
Equity
FI
Policy Portfolio
Alt Allocation
Number of Managers
Econ Scale
Ability to Negotiate fees
Active/Passive
Investment Model
Traditional Consultant
Assist internal Staff
Report to Board
Cost increase with Size/Complexity
Shift to outsourced CIO over last decade : 35 - 40% OCIO
Fof
Manager report to Inv. Committee
Oversight is responsibility of Fof Manager
CIO
Type
External
Report to Inv. Committee
Could be
Stand Alone Firm
Fof Manager
Division of Consultant Firm
Internal
Hire/Oversight of Managers
Report to Inv. Committee
Considerations
Cost
Team
Expertise
Vehicles Used
LP
More complex Due Dill
SMA
Greater transparency
Clearer Cost
Pooled
Embedded costs
More tightly regulated
Could have additional wrap fees
Cost Components
Portfolio Construction & Mgmt
Direct Mgmt Fees
Active/Passive
Fee Budget
Carry/Incentive Fees
Profit Share of LP
Traditional Performance Fee
Transaction Related
Trading/Brokerage
Eq
C per Share
Futures. $/Contract
FI. bps
Market Impact
Outside service to monitor and imporve
Prime Brokerage Fees
typically embedded
Sec Lending
Clearance
Settlement
Reporting
short covering
Fund Servicing Cost
Custody
Audit
Legal
Admin
Oversight
Overhead
Staff
IT
Internal Legal
Ongoing costs
Wrap Fees
Consultants
Ind. Mgmt Office
Fof Manager
Outsourcing Cost
OCIO
Cost very - scope
BE around 2-3 B
Factors to Consider
cost in the agreement
Fees in what categories
Shop like structures
Charge to similar clients
Flow through Sub advisor
Calc Cost
Q
Fund Fees
Specific Service
Transaction
Admin