Changing supply and demand dynamics in alternative investments have led to a material drop in asset management fees, research by Mercer shows.
The consultant’s 2012 Global Asset Manager Fee Survey found fees have remained the same or grown in almost all asset classes, but found asset managers under most pressure to cut charges were those trying to negotiate fees for hedge funds, direct private equity and infrastructure funds.
It said where alternatives had was once used the industry standard “2 and 20” fee structure, it has now moved closer to “1.5 and 20” as supply and demand dynamics have led managers to be more flexible in negotiating fees.
The fifth such biennial survey, which analyses data from more than 25,000 asset management products from over 5,000 investment management firms, found the majority of managers left fees relatively unchanged, while a third had increased charges.
Where fee reductions have occurred, the greatest falls have been in equity mandates. However, retail equity funds have tended to lower their fees more than have their institutional and segregated counterparts.
Mercer global director of consulting Divyesh Hindocha warned unless managers became more innovative with fee structures, the demand for active management could “fall off a cliff”.
“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,” Hindocha added.
“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.”
Taking all asset classes into consideration (in $US), Mercer found that 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 fall of 0.08% since 2010.
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