(January 22, 2013) — A greater willingness of managers of hedge funds, direct private equity, and infrastructure funds to negotiate fees has made alternatives the only asset class to have experienced a material drop in asset management fees, according to Mercer.
In alternatives, what was once a “2 and 20” industry standard continues to move toward “1.5 and 20,” a trend fueled by supply and demand dynamics leading managers to be more flexible in negotiating fees, Mercer said.
Geographically, the firm discovered that–taking all asset classes into consideration in US dollar terms–Canada remains the most inexpensive country/region in which to invest, with average median fees of around 0.3%. The UK and Europe are also relatively low priced, with average median fees of around 0.4% and 0.5% respectively. Emerging markets remain the most expensive country/region at 0.89% on average, with Asia averaging 0.75%, a decrease of 0.08% since 2010.
“Given the plentiful supply of good quality active management, the level and structure of active fees has been remarkably resilient to a slowdown in demand,” said Divyesh Hindocha, global director of consulting for Mercer’s Investments business. “As we move from a defined benefit based pensions system to a defined contribution based pension system, which is much more cost conscious, our hope and expectation is that we see some innovation in this area, as otherwise the demand for active management may well fall off a cliff.”
The firm found that around a third of managers have increased their fees. Most small cap equity strategies have increased fees except in the US where such fees have tended to decrease.
Mercer’s 2012 Global Asset Manager Fee Survey, the fifth such biennial survey, analyzes data on more than 25,000 asset management products from over 5,000 investment management firms. The survey covers asset managers in a range of geographies and across numerous products, by way of pooled and separately managed accounts. The study is intended for use as a reference when assessing asset management fees.
The general topic of fees is often a sensitive one in the asset manager/owner relationship–both parties have competing goals when it comes to negotiating such a payment. In September, aiCIO examined the fee structure of the roughly $6.5 billion Wyoming Retirement System. The scheme has reworked the way it calculates fees for their managers in an effort to lower costs, compensate managers more fairly (in their view), and improve the incentive structure that guides manager decisions.
According to fund Chief Investment Officer John Johnson and Senior Investment Officer Jeffrey Straayer, fee structures for fund managers need to shift control into the hands of asset owners. Traditionally, fund-manager fee structures paid by pension funds have led to overpaying managers when they’re doing well, yet managers maintain that payment when they’re underperforming, according to Johnson. Most asset owners have fund-manager fee structures that include high fixed fees with a performance fee added, which leads to fund managers indexing and gathering assets to maximize their paycheck, Johnson told aiCIO in September. “That business model shifts risk to the pension fund rather than to the fund managers.”
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