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:
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.
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.
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.
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.
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.
The average net value (NVA) added in CEM’s database has been 16 bps per year. In individual years, the average NVA can be significantly lower or higher, with a high proportion of active managers either beating or underperforming their benchmark. How did active stock managers perform in 2022 compared with 2020-2021? Read Chris’s ‘early bird’ analysis from our 2022 DC Benchmarking universe.
Client transparency best practices curated by Edsart
The Global Pension Transparency Benchmark ranks the quality of fund disclosures and identifies best practices in 15 countries. In this column, Edsart shares a Governance best practice from Old Mutual Superfund in South Africa. Let's see how they disclose Board Effectiveness to stakeholders in their annual report.
Janjaap's tips for getting the most out of your dashboard
Our Dashboard provides a wide range of pension analytics, comparisons, and visuals to support a variety of use cases and stakeholders. In this "Key Strokes" video, Janjaap shows you how to share access with third parties (e.g. with your plan's consultant).
Learn survey best practices and how to access the PIN for support
James West has joined CEM with more than 25 years of pension industry experience. He's also a plan member and former CEM client, which puts him in a unique position to share perspectives from different viewpoints. James shares what's coming for VoC and how together, we can improve member experiences.
Two of the hottest topics in Pension Administration today are Human Resources (HR) and the implementation of Robotic Process Automation (RPA) to improve internal processes. Learn what PIN members are doing to attract and retain their staff and where they are in their journey to implement RPA.
Rhijuta Dahal is an Analyst in our UK office. But besides being a pension enthusiast, she is a mom, avid traveler, and advocate for social enterprise. Meet Rhijuta and learn about her diverse career journey.
