Fees are down, but some fees are less down than others

Chief Investment Officer’s Steffan Navado-Perez reported – before the wave of coronavirus news washed over us – on new research from Harvard and Stanford showing pension funds have been paying vastly different fees at the same funds.

As the COVID-19 tide eventually recedes, here is another issue private funds will need to come back to.

If LPs were pushing fees down, they were not doing it uniformly. There is little data explaining what exactly makes the difference between an LP willing to pay more, and one that won’t. While previous research has suggested the sophistication and resources of an LP can give it better access to special attention from GPs, Navado-Perez’s read on the findings is when it comes to fees, being a bigger allocator may not mean commanding lower fees.

The two researchers, Juliane Begenau and Emil Siriwardane  say “size, relationships, and governance account for some of the pension effects, but the majority appear orthogonal to these observable characteristics.”

So what gives?

Fund managers are obviously not gas stations. They don’t post a price on a sign for a commodified product, even if there are complaints that fund management is becoming more commodified. Agreements are still highly structured, and each LP comes to the table with different needs and expectations. It’s not an efficient market, and there is upside in the inefficiency to be uncovered.

Who profits from inefficient markets? The smart money does. And just like freestyle chess or Go players, smart money aided by machines does better.

As we’ve said elsewhere, smart fund managers are beginning to accumulate the data operations capability to mount dashboards and data transparency that can win deeper relationships with LPs. They can extract themselves from being commodified. If anything, the new world COVID-19 is bringing us may hasten that transition.

Fees may be going down, but the variability in fees calls out for efficient data operations that can unlock the value of relationships.