Fund fees to come under pressure in 2009

Mercer's asset manager fee survey shows managers are willing to discuss and negotiate fees as alpha competes with cheap beta.

Asset management fees remained stable in 2008 but are likely to come under pressure in 2009, according to a report issued by Mercer.

Early indications gathered by Mercer's 2008 asset manager fee survey shows that managers are "hungry" for more assets and there is greater willingness to discuss and negotiate fees. This is especially the case in some of the alternative asset classes such as hedge funds.

There are a number of reasons for the willingness of fund managers to accept lower fees.

"Alpha is now competing with cheap and plentiful beta and capacity is no longer an issue for most strategies," says Divyesh Hindocha, worldwide partner in Mercer's investment consulting business. "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."

Conducted every two years, Mercer's survey evaluates fee data on 19,000 asset management products from 3,400 investment management firms. The survey covers asset managers in a range of geographies and across numerous products including pooled and separately managed accounts.

The survey shows alternative investment strategies to have the highest fees for each dollar of investor capital allocated.

"One needs to take care before passing judgement on this evidence, as return and risk considerations should take priority over fees," Hindocha says. "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 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.

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 says.

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 US equity averaged around 0.4% to 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% to 0.7%.

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 US 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 US small caps commanded the greatest premium of between 0.25% and 0.3%.

 In Europe, Japan and UK equity, the premium ranged from 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%. This compares to an average of 0.3% to 0.4% for other regions including Asian bonds.

In terms of equities, emerging markets proved to be the most expensive, with median fees in emerging markets debt averaging around 0.6%. As expected, the report showed 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.

¬ Haymarket Media Limited. All rights reserved.