Asset mgmt fees for non-traditional classes under pressure

Asset management fees for most non-traditional asset classes have fallen following increased scrutiny from cost-conscious investors, according to a report by Mercer.

The Mercer report found that fees for hedge funds, private equity, infrastructure and real estate have all decreased. Whilst fees for traditional asset classes have varied, with some increases observed in long-only equity and fixed income strategies.

Mercer’s 2010 Asset Manager Fee Survey is a bi-annual report analysing fee data on more than 20,000 asset management products from over 4,000 investment management firms.

The survey covers asset managers in a range of geographies and across numerous products including pooled and separately managed accounts. The study is intended for use as a reference when assessing asset management fees.

Divyesh Hindocha, Global Director of Consulting said that this is evidence of the impact of the financial crisis continuing to be felt by companies and investors.

“Although not universal, subdued investment returns have taken the edge off many alternative asset products. Combined with an increased focus on operational costs this trend has put growing pressure on asset managers to reduce the complexity of their products and lower their fees in the already pricey alternatives arena,” Mr Hindocha said.

“We believe there is room for further simplification and larger reductions in the overall fees charged by asset managers,” he said.

Ms Marianne Feeley, Mercer’s Asia Pacific Head of Manager Research said that in Australia, there is a a downward pressure on fees in alternative asset classes.

“This is even the case in some of the newer alternative areas such as infrastructure debt, where clients are less willing to pay a private equity-like fee for a product that doesn’t have that private equity-like upside. Our clients are also expecting hurdle rates on fees to align better with target returns, a phenomenon which has been apparent in real estate,” Ms Feeley said.

Traditional asset classes
Ms Feeley also says that in traditional asset classes, Australian fixed income has the largest average increase in fees, although this is off a low base.

“Managers have performed well against global peers and are willing to drive a harder bargain. In the equity area, Australia is one of the few markets where boutique managers have higher average fees than all other managers.

“Boutique firms in Australia, with their owner-operated model, are very protective of their capacity and don’t hesitate to set a higher fee, knowing that there is a limit on assets than can be managed,” she said.

Global emerging markets equity remains the most traditionally expensive asset class category with median fees averaging around 1.0% - up from 0.90% in 2008. Small cap equity also continues to be an expensive category with fees averaging around 0.89%. Global and regional equity strategies average 0.70%, whereas fixed income continues to be the cheapest traditional active asset class with average fees around 0.35%.

“The observed fee increase for long-only fixed income strategies is somewhat surprising given that there is no shortage of high quality strategies in this area. Fees charged for niche equity strategies, such as small cap and emerging markets continue to be higher than for most fixed income strategies, reflecting the value-added potential of the mandates,” Mr Hindocha said.

With an average fee of 0.68% pooled funds are more expensive than segregated fees across all comparable mandate sizes. There was no change in average fee levels for pooled vehicles between 2008 and 2010 - across all mandate sizes. Average fees for mandate sizes of $25 million have decreased whereas for mandate sizes between $100 million and $200 million average fees have increased. Segregated fees have increased by on average 0.7 basis points, with the larger mandates increasing by slightly more.

“One explanation for the increase in segregated fees is that managers are using fees to ration out demand for those asset classes where there are capacity issues,” said Mr Hindocha.

When comparing the data by regions, Canada is the least costly, with average fees of around 0.3%. The UK and Australia follow with average fees of 0.46% and 0.47% respectively. Emerging markets remains the most expensive, at around 0.87%, with Asia-Pacific a close second at 0.83%. Japan, Europe and US all range between 0.57% and 0.7%.

Copies of Mercer’s 2010 Asset Manager Fee Survey can be obtained at http://www.mercer.com/globalfeesurvey

ENDS

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