Defined Benefit
Nonprofit

Total Expenses for Institutional Investors Fell 5% From 2015, Callan Survey Finds

Total Expenses for Institutional Investors Fell 5% From 2015, Callan Survey Finds
clock
3 min 25 sec

Institutional investors paid an average of 54.2 basis points for total fund expenses, according to Callan’s 2021 Cost of Doing Business Survey, a 5% drop from 2015 and the first decrease in the history of our survey. The vast majority of those expenses went toward external investment management fees, which fell 4% from 2015.

This year’s survey reflects trends on 2020 expenses for 163 organizations representing 194 plans with more than $975 billion in assets under management (AUM), including public defined benefit (DB) plans, corporate DB plans, and nonprofits. Public plans accounted for 44% of respondents, the largest investor type represented. By industry, the largest share of respondents came from the government sector, at 36%. Organizations with less than $2 billion in AUM represented 70% of respondents.

The survey also found that respondents allocated 35% of their portfolios to U.S. equity, down 6 percentage points from 2010. Nearly 60% of that allocation went to passive strategies. In terms of alternative asset classes, the share of respondents with allocations to hedge funds fell 4 percentage points from 2015, while the share with allocations to private equity and real assets rose 1 and 3 percentage points, respectively. But allocations to alternatives varied widely by investor size, with large funds (more than $10 billion AUM) allocating 25% on average, compared to 14% for medium-sized funds ($2 billion-$10 billion), and 10% for small funds (under $2 billion).

This blog post provides a high-level summary of our survey’s findings, organized by topic:

Investment-Related Expenses

  • Average total expenses by investor size ranged from 56.1 bps for small plans, to 43.8 bps for medium plans, to 53.6 bps for large plans, due to their greater usage of higher-fee alternative asset classes.
  • By investor type, nonprofits paid the most, at 72.1 bps, due to their relatively higher allocations to alternative asset classes. Public plans paid 51.4 bps and corporate plans paid 48.2 bps.
  • The average external investment management fee was 43.2 bps, down 1.9 bps from 2015.
  • Large plans paid the highest investment management fees, at 51.5 bps on average, again due to their relatively higher allocations to alternative asset classes. Medium funds paid 40.0 bps and small plans paid 42.5 bps.
  • By investor type, nonprofits paid the highest average management fees, at 52.5 bps, while corporate plans paid the lowest, at 36.3 bps.
  • Investment-related staff compensation jumped 23%, the largest percentage increase of any major expense category.

Custody Fees

  • The average fee for custody services was 3.7 bps. By investor size, the average fee ranged from 5.6 bps for small funds to 0.3 bps for large funds, which greatly benefit from their scale and from efforts by the largest custodian banks to increase market share.
  • In terms of the use of custody services, 81% of respondents employed global custody services for U.S. assets and sub-custody of non-U.S. assets, the highest share for any category.

External Investment Managers

  • Respondents had on average 17 investment managers for their private equity allocations, the most of any asset class. Real assets at 12 and hedge funds at 8 rounded out the top three.
  • Public asset classes had smaller numbers, with 4 for U.S. equity and 3 for both global ex-U.S. equity and fixed income.

Staffing

  • Large funds had on average 13.3 dedicated staff members (referring to employees who have few if any responsibilities beyond fund management). This is five times the number for small funds.
  • For all respondents, non-dedicated staff declined 44% since 2015, to 3.1 on average. And the average number of total staff fell 12% since 2015, to 10.0.

Oversight

  • 38% of respondents used both a board of directors and an investment committee to handle fund oversight.
  • 53% of board members were elected, vs. 13% who volunteered. On average respondents had 10 board members.
  • 63% of investment committee members were appointed compared to only 5% who volunteered. The average committee size was 7 members.

Other Findings

  • Respondents cited the Highway and Transportation Funding Act of 2014 as the regulation with the greatest impact on expenses. Rules regarding the COVID-19 pandemic came in second.
  • 44% of respondents planned to review and/or renegotiate their fees over the next one to two years.

Please find the full details of our survey at the link below.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Operations

Callan Discount Rate Reporter: December 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.
Operations

Callan Discount Rate Reporter: November 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.
ESG

DOL Issues Final ESG and Proxy Voting Rule

Kristin Bradbury
Kristin Bradbury and Tom Shingler analyze the DOL's Final Rule on ESG and proxy voting.
ESG

Callan Survey Sees First Decline in ESG Incorporation Since 2019

Thomas Shingler
Tom Shingler and Hannah Vieira describe the findings of our 2022 ESG Survey.
Operations

Callan Discount Rate Reporter: October 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.
Operations

Callan Discount Rate Reporter: September 2022

Corporate DB Plan Focus Group
The Corporate DB Plan Focus Group produces a monthly update on the impact of interest rates on corporate defined benefit plans.
Operations

Yes, 2022 Was Awful for Public DB Plan Returns. But the Last Decade Has Been Great.

Weston Lewis
Weston Lewis and Brad Penter analyze 2022 returns for public DB plans and provide historical context.
ESG

Callan Survey Finds Nearly 50% of Respondents Incorporate ESG, Highest Level Ever

Thomas Shingler
Tom Shingler provides key takeaways from the Callan 2021 ESG Survey.
Operations

After a Remarkable 2021, a Closer Look at Public DB Fiscal Year Returns Over Time

Brady O'Connell
One needs to go back to 1985 to find a single year with a return higher than what the median public plan achieved during 2021.
Operations

Understanding Return Forecasts for Public DB Plans

Brady O'Connell
Brady O'Connell and John Pirone explain how to distinguish between actuarial discount rates and consultant return expectations.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.