Plus hot topics in pension administration (HR and RPA); Governance Transparency (Board Effectiveness); VoC updates, Meet a CEMer!; and more!
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Newsletter Edition: Spring 2023

Letter from our CEO

CEM has spent more than 30 years analyzing proprietary data from institutional investors globally. What are the enduring insights? Let’s dig in. 

 

I am often asked about the key lessons CEM has learned and, more importantly, that can be actioned by institutional investors. In this edition of Peer Intelligence, I focus on macro insights from benchmarking investment performance. 

 

These insights draw on data collection from ~500 institutional investors we interact with annually, capturing US$14T in AUM. There is one small bias: funds that have benchmarked with us for long, uninterrupted stretches have generated about 5 bps more of value from active management. We have not adjusted for the bias in the findings below. 

 

 

With respect to the highest-order insights pertaining to investments, we have learned:

  1. Funds earned 69 bps of gross return, netted for transaction costs. With 80% of AUM actively managed, investment teams have been able to beat their benchmarks, before cost. As a reminder, we measure performance relative to benchmarks at the total fund, asset class, and mandate levels.

  2. Most, but not all, of the gross returns have been consumed by costs. Investment management costs have been, on average, 53 bps. Thus, three-quarters of gross return has been consumed by investment management costs alone.
  3. Overall, this means that investors have added an average of 16 bps in net value add. This translates into nearly US$200B in value add for our tracked AUM over the past 30 years. For context, only 6 retirement funds in the U.S. today have more than US$200B in AUM.
  4. Managing costs is key for long-term outperformance. As time horizons get longer, gross return performance increasingly follows a random walk, whereas the performance of costs is persistent. This means that costs are, ultimately, more controllable. Managing costs matters.
  5. Low-cost is not necessarily cost-efficient. Neither lowest cost, nor highest cost, maximizes a net value add. The choice of an optimal investment strategy is based on the fund’s attributes and strategic objectives, as well as the characteristics of specific asset classes. I’ll delve into this in a future edition of Peer Intelligence.

In future editions of Peer Intelligence, I’ll also make sure to share insights for Pension Administration, as well as actions that funds have taken based on our insights.  

 

Finally, in this edition of Peer Intelligence, we:

  • Look at the (very) early insights we’re seeing in Defined Contribution this year;
  • Review how to share access to CEM insights with third-party providers;
  • Introduce James West as our new Product Manager for the Voice of the Customer subscription;
  • Explore a best practice in governance disclosure from South Africa and;
  • Chat with Rhijuta Dahal about her dual role as a CEM Analyst and mom.

Thanks, as always, for reading.

 

Rashay

Rashay circle

Rashay Jethalal, CEO

Rashay@cembenchmarking.com

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