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Small funds pay more, get less returns than larger plans – study

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The smallest U.K. corporate pension funds on average pay 4 basis points more for investment management services compared with the largest retirement funds, according to ClearGlass Analytics.

A recent study of 850 pension funds and 431 money managers by ClearGlass, which specializes in fee data and analytics in the U.K. money management industry, showed that defined benefit pension funds with more than £5 billion ($6.9 billion) in assets on average pay a mean 62 basis points in costs and charges a year — including all transaction costs, performance fees and third-party costs but not administration fees. That compares with the 66 basis points that pension funds with less than £100 million in assets pay on average each year.

However, ClearGlass also showed that some of the pension funds with less than £100 million in assets pay as much as 363 basis points, while pension funds with more than £5 billion pay a maximum of 101 basis points.

“The maximum cost goes up the smaller you are,” Christopher Sier, CEO and co-founder of ClearGlass, said in a telephone interview. “As you get smaller the outcome becomes much worse.”

The research showed that the net mean performance of money managers improved with the size of the pension funds’ assets. Pension funds with less than £100 million in assets had a mean net performance 0.1%, while those with more than £5 billion in assets had a mean net performance of 2.4%.

“The smaller you are the worse the performance number can be. When you are small you can suffer from … a terrible performance for a very high cost,” Mr. Sier commented.

Looking at 11,000 strategies, ClearGlass also ranked money managers across 18 strategies on cost and performance, establishing that very few managers ranked as both high performers and low-cost service providers. For example, out of 72 managers studied in the global active equity category, WCM Investment Management, Global Thematic Partners, Strategic Global Advisors and Unigestion achieved a top score for each of the categories. Among 23 managers running active U.K. equity strategies studied, only BlackRock and Abrdn placed in the top quartiles for the two categories. For global passive equity strategies only State Street Global Advisors offered both high performance and low cost among 27 managers.

LGIM was named top quartile manager for performance and lowest cost for global absolute return bonds among 34 managers.

Among 31 managers, LGIM, BlackRock and Robeco landed in the top quartile for multiasset credit. BlackRock alongside Schroders also topped emerging market debt ranking among 17 managers.

“(The) vast majority of managers are not delivering what I call value for money,” Mr. Sier concluded.