Investors not willing to pay for alpha: Mercer

Pension funds could soon hold bargaining power over funds managers, particularly in the alternative asset classes, with asset management fees predicted to decrease in 2009 and beyond.

Alternative product fees are expected to come under increasing scrutiny given mixed results in 2008, according to Mercer’s 2008 Asset Manager Fee Survey, the biennial report that analyses fee data on 19,000 asset management products from 3,400 investment management firms around the globe.

Fund of fund providers in particular will come under pressure to defend the scale of fees being charged, the report notes.

“Historically, fees are higher in those strategies where asset managers have the most potential to outperform,” Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business, said.

“However, anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients. Alpha is now competing with cheap and plentiful beta and capacity is no longer an issue for most strategies.

“There is a recognition that institutional investors are no longer willing to pay, upfront, such large proportions of the potential alpha, especially for the more complex strategies.”

The most expensive mainstream category was global emerging markets equity, with median fees in the sector averaging around 0.9 per cent. Median fees for eastern European equity and Chinese equity, which were included for the first time in the 2008 report, were similarly high.

According to Mercer, small cap equity continues to be an expensive strategy with median fees around 0.8 per cent, while active fixed income had the lowest fees among mainstream active strategies – an average of 0.2 to 0.35 per cent.

Marianne Feeley, head of manager research at Mercer, Asia Pacific, said managers will have to become more competitive on fees if they want to survive in this more cost-conscious environment.

“In the report we note that the potential for that phenomenon would be seen in hedge funds and in those asset classes where they were advertised as alpha but really there’s a lot of beta,” she said.

“Investors are finding that beta can be had more cheaply, so these [alternative] asset classes are needing to compete.”

For segregated large cap/all cap equity products, Canadian equity proved the cheapest, with median fees varying from 0.25 per cent to 0.35 per cent. Australia, New Zealand and US equity averaged around 0.4 to 0.5 per cent.

The UK has nudged through the top of the band with median fees in UK equity all cap products approaching 0.6 per cent. Asia, Europe,

Japan and global equity continue to be the most expensive, with median fees averaging 0.5 to 0.7 per cent.

Not surprisingly, the report showed that the median fees for passive, or index-based, equity strategies are 0.5 to 0.8 per cent less than those for active strategies. Index-based fixed income strategies continue to cost 0.1 to 0.3 per cent less than their active counterpart.