Competition Failing To Drive Down Asset Management Fees

by Phillip Morton, Investors Offshore.com

03 January 2007

Despite the competitive nature of the market, institutional management fee levels for traditional asset classes have remained stable since 2004, according to a study by Mercer Investment Consulting.

Mercer's latest global study of institutional management fees comes at a time when many believe investors are in an environment of lower expected investment returns. Investment management fees can be a material drag on performance in such an environment, the report notes.

According to the study, which covers 164 traditional and alternative institutional investment strategies, fees are highest in classes where asset managers have the most potential to outperform.

Mercer's study also concluded that:

Emerging markets equity is the most expensive regional asset class, with median fees for a $100 million segregated mandate at 0.88% or 88 basis points (bps), decreasing slightly to 83 bps for a $250 million fund.

In contrast, fees for traditional active fixed income are markedly lower. Fees across the regions hover around 25 bps, with less paid for government products and more for high-yield bonds and credit-driven products. Index-based fixed income strategies are between 15 bps and 30 bps cheaper than active fixed income strategies, depending on account size.

When compared with other regions Australia and New Zealand recorded average fees for equity products, averaging around 0.4% to 0.5%. This region was also among the least expensive in a comparison of fixed income products with fees averaging around 0.15% and 0.25%, compared to 0.2% and 0.4% on average for other regions.

Fees have remained relatively stable since 2004 when Mercer last published its study, with Asia ex Japan, Europe ex UK and global fixed income becoming marginally cheaper to access, and Europe (inc UK), global value, global growth, UK equity and US large cap becoming slightly more expensive.

“Given that we are in an environment of lower expected returns, albeit one with a ‘dash for alpha’, we believe investment managers will find it hard to justify above-average fees unless they have demonstrable competitive advantages which they articulate clearly,” said Divyesh Hindocha, worldwide partner and global director of consulting at Mercer Investment Consulting.

“A comprehensive review of performance should include cost analyses on an absolute basis and also relative to asset class peers. The data from our study provides the basis for such an informed analysis,” he added.

For large cap/all cap equity products, Canada was by far the cheapest at around 30bps. Australia, New Zealand, US and UK averaged around 40bps and 50bps, while Asia, Europe, Japan and global averaged 50 bps to 70 bps. The most expensive was the emerging markets equity category at around 90 bps.

Small cap equity products are more expensive, with Canadian, global and US small caps commanding a premium of 25 bps to 30 bps, compared to Europe, Japan and the UK, where the premium ranged between 15 bps and 20 bps. The limited capacity of small cap equity managers means that fees decline less rapidly as placements grow.

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