Investors in funds of funds target further cuts in fees

Real estate investors in non-listed funds of funds will seek to apply further downward pressure on fees to minimise overall management costs in the future, according to the INREV Fund of Funds Fees Study 2011.

The study found that there is more pressure from investors to reduce management fees than to attack performance fees, but both are under scrutiny. Nonetheless, fees for funds of funds remain simpler and less burdensome than those associated with underlying funds. The average management fee, based on NAV was 0.37%. Other bases for fee calculations included commitments to underlying funds, drawn commitments and invested equity.

Fee levels varied according to fund style and size, with the highest management fees attributed to closed-ended funds (0.86%), where calculations were based on invested equity. Interestingly, funds of funds with equity of between EUR 500 mln and EUR 1 bn attracted lower fees on average (0.34%) than those with equity of less than EUR 500 mln (0.43%),indicating reductions on the basis of economies of scale.

Around 60% of the funds surveyed reported demanding performance fees - predominantly on higher risk funds. Investors seem comfortable with these fees, so long as funds perform well. However, there is a growing emphasis on demonstrating that performance is based on realised returns as opposed to valuation-based capital gains.

'What we’re seeing now is a real focus on reducing the fee burden for funds of funds. Management fees are a clear target but, with performance fees, I think we’ll see some interesting developments,' said Lonneke Löwik, INREV's director Research and Market. 'More attention is given to performance fee structures, these should truly encourage outperformance and should be based on realised returns rather than rewarding standard fund management.'