Study: Higher Institutional Investment Fees for Higher Return Potential

December 13, 2004 ( - Institutional asset management fees are higher for asset classes with the greatest potential to add value, with emerging markets management coming in as the most expensive.

These are the results of a Mercer Investment Consulting survey, which also shows that small-cap management is more expensive than large-cap with the average small-cap management fee hovering around 85 bps in the US. In contrast, the average large-cap fee sits at around 58 bps for the same size fund, according to a company press release. While emerging markets weigh in as the most expensive asset class at 95 bps for a segregated account worth $50 million, other traditional asset classes are far less expensive. Fixed-income, for example, usually costs around 25 bps, with even less paid for stable government bonds and more paid for high-yield issues. Bond investing tied to indices comes even cheaper, with average fee percentages hovering between 0.15% and 0.30%, according to Mercer.

As is usually the case, the Mercer survey found that as accounts increase in size, the percentage withheld for fees decreases. In the case of the emerging markets scenario, a $75 million account will cost only 90 bps to manage on average.

It is common for pooled fund management to be cheaper than separate accounts, but this benefit tends to even out at approximately $25 million, according to the survey. For core international equities however, the cost differential between the two styles is essentially zero. When custody costs are factored in however, a pooled vehicle for international equity is a good choice for plan sponsors in most mandate sizes, according to Mercer.

Global equity fees vary by region as well, the survey shows. Asia is the most expensive, with fees reaching 75 bps, while Canada is the cheapest with fees between 30 and 40 bps, depending on style.

The Mercer study – “Mercer’s Global Investment Management Fee Study” – can be purchased at .