Reliable alpha does not necessarily come with higher cost charges for investors, according to a new study from investment consultancy bfinance.

Rather consistent and outperforming managers tend to adopt a below average pricing policy. 

“Counter intuitively, the correlation between high quality asset management and fees is weak," said Ian Shea, head of equities at bfinance. 

"The most adept managers are also those that are most inclined to be competitive on fees and inclined to work with asset owners to find creative performance fee solutions. If negotiations are managed well, it seems you can have your cake and eat it too; significant savings can be achieved.”

Overall, bfinance found that fee levels have remained consistent over the past three year period since bfinance last conducted this survey with the single exception of “low vol” strategies where fees have declined as investment product offerings in this asset class have proliferated. 

In a study of over 650 investment managers and 3200 responses, findings provide strong evidence that sophisticated institutional investors have considerable scope and ability to negotiate lower fees and best value from asset managers, irrespective of investment strategy.

Active managers showing a genuine capability to outperform their benchmarks over time do not ask for higher fees. In fact, their price positioning is identical to that of managers less able to generate the best performance over the long term.

The level of management fees quoted in the first stages of a tender procedure is not set in stone. Rebates achieved through negotiation represent on average 20% off the initially quoted price.

Scale seems to be a key driving factor however, as the study found that fees diminish significantly as assets increase. Data from mainstream active long-only asset classes indicate that fees on mandates of €400m decrease by 15% compared to €100m mandates.

In a growing number of mandates, managers are happy to propose alternative methods of remuneration based on performance fees with this trend being strongest, unsurprisingly, with equities strategies.

“The dynamics of setting management fees depends upon a host of factors that have little to do with the functioning of a competitive market, where pricing power would benefit the best managers most efficiently. It is therefore crucial to concentrate on the capacity of each manager to create value, before entering into negotiations on fees with the best managers at a later stage in the RFP process,” said Emmanuel Lechere, head of the market intelligence group at bfinance.