Article written by Charles Manty, Investment Consultant at PBI Actuarial Consultants Ltd., published in Benefits Canada.
Investors have seen fixed-income yields pushed lower as central banks venture into uncharted policy waters. Meanwhile, equities are once again vacillating in the face of multiple economic headwinds, following years of barely a rest on their march to ever-greater heights from their 2008-09 nadir.
In response to decreasing yields and increasing volatility, institutional investors continue to reduce their holdings of traditional fixed-income and equity assets in favour of private investments that promise the holy grail of higher returns and lower volatility. But the holy grail comes with a catch.
Private investments (whether debt, equity or real assets) usually have base management fees of between one and two per cent. With few exceptions, private investments also charge a performance fee — also known as carried interest — that often includes a nasty thing called a catch-up provision. All of these fees contrast with traditional actively managed fixed-income and equity investments that generally have base management fees that rarely exceed 0.8 per cent. With so many components to the fees for private investments, it’s often difficult to realize how much they’re biting off of returns.
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