Asset Manager Fees May Come Under Scrutiny in 2009

Mercer’s 2008 Asset Manager Fee Survey shows alternative investment strategies to have the highest fees for each dollar of investor capital allocated. Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business, says “return and risk considerations should take priority over fees. 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,” according to a press release.

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% – 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, in the announcement.

“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.”

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% - 0.5%. The UK has nudged through the top of the band with median fees in UK 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% - 0.7%.

According to a Mercer press release, 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% - 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% - 0.8% less than those for active strategies. Index-based fixed income strategies continue to cost 0.1% - 0.3% less than active fixed income strategies.

Copies of Mercer's Asset Manager Fee Survey 2008 can be purchased at www.mercer.com/icsurveys .