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Novarca Communication of asset management costs

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A presentation delivered to the Transparency task force which helps us to understand not just what we are paying for asset management but what we are getting for our money

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Novarca Communication of asset management costs

  1. 1. Communication of asset management costs How to explain costs levels of asset management to stakeholders April, 20th 2016 Eric Veldpaus
  2. 2. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 2 2© April 2016
  3. 3. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 3 3© April 2016
  4. 4. Page 4 Dutch landscape of Pension Funds • 85% of employees is a member of a Pension Fund • 70 large pension funds for specific branches of industry such as government employees (ABP, with up to € 356 billion AuM and health care employees (€ 166 billion AuM) • Approximately 300 smaller company Pension Funds • Mostly Defined Benefit contracts, but risk sharing between employers, employees and pensioners • Specific framework set by Dutch Central Bank (DCB) • Necessarily to hedge interest • Limits with regard to asset allocation • Influence of currencies • Obligations with regard to information to stakeholders 1.Introduction 4© April 2016
  5. 5. Pension Fund industry: roles and responsibilities • Board of trustees includes social partners • Fiduciary managers / service-providers • Asset managers • Federation of Dutch Pension funds • Regulatory landscape (AFM, DCB) Page 5 5© April 2016
  6. 6. Responsibilities Board of Trustees with regard to costs • The Board is responsible for costs and cost reporting • Organize adequate reporting of costs by their asset managers and / or service-providers • Disclose costs (taking complexity into account) Page 6 6© April 2016
  7. 7. Recommendations • Report the costs related to pension management in euros per member. The number of members is the sum of active members and pensioners. • Report the asset management costs as a percentage of the average asset under management. In addition, review these costs in relation to: • The investment mix selected and the associated benchmark costs • Long term return • On a separate basis, report the transaction fees as a percentage of the average assets under management. Page 7 7© April 2016
  8. 8. Implementation results • High compliance rates to the Recommendations. 96% of funds report pension management costs, 95% asset management costs and 77% transaction costs (2014). • Increase in cost comparability between funds. • Regulator and supervisor use Recommendations in law and regulations. • Transparency leads to media attention, questions from Page 8 8© April 2016 Source: Federation of Dutch Pension Funds, February 3rd, 2016
  9. 9. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 9 9© April 2016
  10. 10. 10© April 2016 Source: Pensioen Pro Nr. 07 Asset management costs 2014 Top 15 highest costs(bp) Top 15 lowest costs(bp)
  11. 11. • Compare cost level with other pension funds? • Asset management costs compared to peer group? • How to explain to stakeholders? • Comparing apples to oranges ? © April 2016 11 How to explain?
  12. 12. Risks, return and costs Costs • Risk and return are central issues; costs follow from these. • Do not look at the costs separately, but always in relation to return and risks. Return (asset allocation) Risks Page 12
  13. 13. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 13 13© April 2016
  14. 14. Pf. A Pf B. Gemiddelde vermogensbeheerkosten sector : 53 bps IBI Benchmark 17 79 Asset management costs (in bps) 22 70 • Aandelen 35% 50% • Vastrentende waarden 60% 30% • Alternatieve beleggingen 5% 20% Netto rendement verslagjaar (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocatie Index 85 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 14 Which pension fund do you prefer? Waarvan prestatie gerelateerde vergoedingen 0 20 Waarvan excess rendement 0 100 Waarvan excess rendement 10 250
  15. 15. Pf. A Pf B. Average management costs of the Dutch pension fund industry 53 bps.mark 17 79 Asset management costs (in bps) 22 70 • Aandelen 35% 50% • Vastrentende waarden 60% 30% • Alternatieve beleggingen 5% 20% Netto rendement verslagjaar (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocatie Index 85 125 15 110 IBI Implementatie Index 115 85 © April 2016 15 Average costs as a norm? Waarvan prestatie gerelateerde vergoedingen 0 20 Waarvan excess rendement 0 100 Waarvan excess rendement 10 250
  16. 16. Pf. A Pf B. Average management costs of the Dutch pension fund industry 53 bps IBI Benchmark 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed income assets 60% 30% • Alternative investments 5% 20% Netto rendement verslagjaar (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 16 Asset allocation important cost driver Waarvan prestatie gerelateerde vergoedingen 0 20 Waarvan excess rendement 0 100 Waarvan excess rendement 10 250 Takes differences in asset allocation into account
  17. 17. Pf. A Pf B. Average management costs of the Dutch pension fund industry : 53 bps Benchmark costs 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed income 60% 30% • Alternative investments 5% 20% Netto rendement verslagjaar (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 17 Use benchmark costs as the reference Waarvan prestatie gerelateerde vergoedingen 0 20 Waarvan excess rendement 0 100 Waarvan excess rendement 10 250
  18. 18. Pf. A Pf B. Gemiddelde vermogensbeheerkosten sector : 53 bps Benchmark costs 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed Income 60% 30% • Alternative investments 5% 20% Nett return (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 18 Cost in relation to return Waarvan prestatie gerelateerde vergoedingen 0 20 Waarvan excess rendement 0 100 Waarvan excess rendement 10 250
  19. 19. Pf. A Pf B. Gemiddelde vermogensbeheerkosten sector : 53 bps Benchmark costs 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed income 60% 30% • Alternative investments 5% 20% Net return (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 19 Active / passive management Including performance related costs 0 20 Including excess return 0 100 Waarvan excess rendement 10 250 Takes differences of active / passive management into account
  20. 20. Pf. A Pf B. Gemiddelde vermogensbeheerkosten sector : 53 bps Benchmark costs 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed income 60% 30% • Alternative investments 5% 20% Net return (in bps.) 500 1.000 Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementatie Index 115 85 © April 2016 20 Hedging interest important for return Including performance related fees 0 20 Including excess rendement 0 100 Waarvan excess rendement 10 250 Including return interest hedge 200 150
  21. 21. Pf. A Pf B. Benchmark costs 17 79 Asset management costs (in bps) 22 70 • Equity 35% 50% • Fixed income 60% 30% • Alternative investments 5% 20% Net return (in bps.) 500 1.000 Average netto return past 3 years (in bps.) 300 900 IBI Asset Allocation Index 80 125 IBI Alpha Index 15 110 IBI Implementation Index 115 85 © April 2016 21 Interest hedge return past three years Including performance related fees 0 20 Including excess rendement 0 100 Including excess rendement 10 250 Including return interest hedge 200 150 Including return interest hedge 300 450
  22. 22. 22© April 2016 Matrix Pf A Pf B Excl. performance related costs IBI Asset Allocation Index vs cost of policy mix IBI Asset Allocation Index vs cost of policy mix IBIAssetAllocationIndexvscostofpolicymix Fund Peers Universe
  23. 23. IBI Transparency Index tm • IBI developed a Transparency Index • This index shows whether all asset management costs are disclosed • Similarly for Pension administration costs Page 23 23© April 2016 IBI Transparency Index vs asset management costs TransparencyIndex Fund Peers Universe Asset management costs
  24. 24. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 24 24© April 2016
  25. 25. Best practice disclosure ? Page 25 25© April 2016
  26. 26. Too much disclosure is unnecessary and confusing • Use investment believes to explain the cost level; • Avoid detailed tables with costs per asset category  next step is to explain that pension funds use different strategies; • The disclosure of cost levels might even be confidential information agreed with asset managers and other service providers such as custodians. The board of directors : • Is responsible for the implementation of the strategy agreed upon in the annual investment plan. • They should receive relevant and detailed information and judge whether the costs are in line. • Based upon this information they might decide to optimize costs. Page 26 26© April 2016
  27. 27. Agenda 1. Introduction 2. Costs and press 3. An example 4. Best practice disclosure 5. Questions and contact Page 27 27© April 2016
  28. 28. 28© April 2016 Eric Veldpaus +31 20 208 8507 eric.veldpaus@institutionalbenchmarking.org Institutional Benchmarking Institute P +31 20 208 8555 F +31 20 208 8525 www.institutionalbenchmarking.org Questions?

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