Asset Manager Fees Might Draw Scrutiny

Mercer’s 2008 Asset Manager Fee Survey shows alternative investment strategies to have the highest fees for each dollar of investor capital allocated. “Return and risk considerations should take priority over fees,’ said Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business, in a press release. “It is fair to conclude, however, that fund of fund approaches extract a heavy premium from the alpha generation process and we would expect this to be under challenge in the new financial environment.’

The most expensive mainstream category, Mercer found, was global emerging markets equity with median fees in the sector averaging around 0.9%. Median fees for Eastern European equity and Chinese equity, which were included for the first time in the 2008 report, were similarly high, the press release said.

Small-cap equity also continued to be an expensive strategy with median fees around 0.8%. Active fixed income had the lowest fees among mainstream active strategies, with median fees continuing to average 0.2% to 0.35%.

“Historically, fees are higher in those strategies where asset managers have the most potential to outperform. However, anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients,” Hindocha commented.

“Alpha is now competing with cheap and plentiful beta and capacity is no longer an issue for most strategies,’ he continued. “There is the recognition that institutional investors are no longer willing to pay, upfront, such large proportions of the potential alpha, especially for the more complex strategies.’

A recent report from Boston Consulting Group found that several factors in this environment will lead to lower fees (see “Fund Fees Expected to Drop’). The firm predicted a proportional decrease in regular fund fees and severe cuts in performance-based fees

Asset Management Fees for 2008

Mercer’s 2008 Asset Manager Fee Survey found that, for segregated large cap/all cap equity products, Canadian equity proved the cheapest, with median fees varying from 0.25% to 0.35%. Australia, New Zealand and U.S. equity averaged around 0.4% to 0.5%. The United Kingdom has nudged through the top of the band with median fees in U.K. equity all-cap products approaching 0.6%. Asia, Europe, Japan and global equity continue to be the most expensive with median fees averaging 0.5% to 0.7%.

According to a Mercer, the results were the same across small cap equity products, where Canada averaged around 0.6% relative to between 0.7% and 1% in other regions. The U.S. small-cap micro segregated fee scale remained one of the most expensive in the survey.

The potential for higher return has allowed successful small-cap managers to command higher fees than their broad cap counterparts. When looking at the fee premium for small caps, Canadian, global and U.S. small caps commanded the greatest premium, between 0.25% and 0.3%. In Europe, Japan and UK equity, the premium ranged between 0.1% and 0.2%.

A comparison of segregated scales for fixed income showed that Australia, Canada and New Zealand were the least expensive with fees averaging 0.2%, the press release said. This compares to an average of 0.3% to 0.4% for other regions including Asian bonds. As with equities, emerging markets proved to be the most expensive, with median fees in emerging markets debt averaging around 0.6%.

The survey found that the median fees for passive, or index-based, equity strategies are 0.5% to 0.8% less than those for active strategies. Index-based fixed income strategies continue to cost 0.1% to 0.3% less than active fixed-income strategies.