It has long been suspected, but unconfirmed, that scale discounts exist when purchasing asset management mandates.
What's a Scale Discount?
A scale discount is a discount given when you purchase more of something. In the case of asset management, a scale discount applies when you invest more money into the fund.
ClearGlass’s research report released in March provides definitive proof that economies of scale exist in asset management but with a twist. Our data shows that while scale discounts do exist, they are only provided by better performing managers. In other words, if you invest a large amount with an 'Elite' asset manager then the manager will pass along an economies of scale discount to you. But if you have chosen an underperforming asset manager, then the manager will not pass along a scale discount.
Read on to learn which mandates receive scale discounts, how big the discount is, the minimum AuM needed to qualify for scale discounts, and the surprising twist about which types of managers provide scale discounts.
What Counts As An Elite Manager?
An 'Elite' asset manager is an asset manager who has low costs and high return. This means below median fees and above median return. A "poorly-performing" asset manager has above median fees and below median returns.
What’s the deal with scale discounts?
Generally, a scale discount (or economies of scale) means that the more of something you buy, the less you pay for each individual unit. For example, compare the price of buying a single can of Coke with buying a crate of 48 - the price of the individual Coke can declines drastically when purchasing a crate.
Normally economies of scale exist because purchasing large amounts allows companies to spread the fixed costs over more units. As a simple example, think about the fixed cost of parcels being delivered to your house and how buying multiple items in a single order allows sellers to spend less on delivery. Sometimes they also exist as a marketing tool to encourage you to purchase more.
Economies of scale exist in many industries. In asset management, there has long been an unspoken expectation that scale discounts exist in our industry too. The more you invest in a mandate, the less the manager should charge you.
But do scale discounts really exist in asset management? How much of a discount should I be asking for? Do all managers and asset classes provide scale discounts? At ClearGlass, we decided to initiate a research project to answer these questions.
What does the data show?
To find the truth, we examined 616 global active equity mandates across 79 asset managers.
ClearGlass data is unique because we hold the most accurate asset management fee data in the world. Cost data provided to ClearGlass is granular and legally required to be accurate.
When we undertook this research project at the start of 2022, we also had the assumption that scale discounts existed and expected the data to be simple confirmation of this fact. However, the sheer size of the discounts surprised us and, critically, these discounts are only provided by high-performing managers (see “what counts as good and bad” above).
Finding 1: Scale discounts reduce charges by as much as 25 BPS In global active equity, we found that investing large amounts with a manager shaves up to 25 BPS off the fees you pay for that mandate. The exact scale discount depends on the amount you are investing and the manager you are investing with.
Finding 2: Scale discounts start from investments of around £60mn and upwards. Many pensions administrators are unsure if their investments are large enough to qualify for scale discounts. Our research showed that scale discounts start to occur in global active equity from investments of £60mn and up. If your scheme has invested more than £60mn in a global active equity mandate then you should be receiving an economies of scale discount. For other asset classes, the minimum investment needed may be less (stay tuned for further articles on this subject).
Finding 3: These discounts are only present in high-performing managers What surprised us is that scale discounts are not ubiquitous across all managers. We noticed while conducting the research that some managers provided economies of scale while others did not. We dug deeper into the numbers to uncover what was going on.
When we looked at only high-performing managers (low costs, high performance), strong scale discounts were present. However, when we looked at only low-performing managers (high costs, low performance), no scale discounts were present- charges were the same regardless of AUM.
Mandates from highly-performing managers are in green while mandates from poorly-performing managers are in red. It can clearly be seen that highly-performing managers decrease price as AuM increases while poorly-performing managers maintain the same price
This led us to the headline conclusion of the research project: good managers provide scale discounts, bad managers do not.
Why don’t bad managers pass on scale discounts?
To be frank, we don’t know. The data in this particular research project does not answer this question and we will leave it up to the individual to come to their own conclusion. But from an investor’s perspective, it almost doesn’t matter- if the mandate was with a top quartile manager then you would be receiving a discount of up to 25 BPS.
What does this mean for me?
It’s worth asking yourself whether any of the mandates you hold with an asset manager are large enough to obtain a scale discount- remember that scale discounts in global active equity take effect from investments of around £60mn and up. And then ask again whether your manager is passing along an economies of scale discount. If you are not receiving a scale discount then, by claiming one, you could stand to reduce your charges by as much as 25 BPS.
If you don’t know whether your asset manager is passing along a scale discount then signing up for ClearGlass might be a good idea. ClearGlass alerts you if you have unclaimed scale discounts.
This article was informed by the ClearGlass Global Active Equities Analyst Report, which you can access here.
Learn more about how the ClearGlass database helps pension schemes monitor and negotiate their asset management fees.