Mercer Study: Asset Managers Ready To Cut Fees

(Reuters) – Resistance from investors burnt by a turbulent 2008 will make asset managers more willing to cut fees this year, a study by consultant Mercer said on Thursday.

Mercer said overall fees in most asset classes were stable in 2008 but it said more willingness to negotiate fees downwards, especially in alternative asset classes, would emerge in 2009 and beyond.

Mercer’s conclusions were drawn from a survey of 3,400 fund managers.

“Historically, fees are higher in those strategies where asset managers have the most potential to outperform. However, anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients,” said Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business.

“Institutional investors are no longer willing to pay upfront such large proportions of the potential alpha (returns above the benchmark), especially for the more complex strategies,” he said in a statement.

He said fees will go down across all asset classes, especially in hedge fund and private equity fund of funds, a popular way for investors to access the alternative asset classes.

Hindocha told Reuters that some investors have already negotiated changes to hedge fund of fund charges by persuading managers to drop the second layer of performance fees.

“You can now have that conversation, two years ago you would have been laughed out,” he said.

Funds of funds have historically charged a double layer of fees but justify the cost by pointing to protection offered by a more broadly diversified investment.

Mercer’s prediction comes after Kerstin Hessius, CEO of the 181 billion Swedish Crown ($20.80 billion) pension fund AP3, told Reuters on Wednesday that the scheme would be seeking to renegotiate fees this year after underperformance from managers during 2008. [ID:nLI10734]

Mercer’s report highlights the most expensive mainstream category among active strategies in 2008 was global emerging markets equity. Active fixed income was the cheapest.

Passive, or index-linked, investment is consistently cheaper than active management which relies on manager skill to generate superior returns. The value of that additional cost has been called into question by investors following the turmoil of 2008.

By Cecilia Valente