January 22, 2013

Alternatives Saw Biggest Drop in Asset Management Fees in 2012: Mercer

‘Demand for active management may well fall off a cliff’ as DC plans overtake DB pensions

Alternative investments finished 2012 as the only asset class to experience “a material drop” in asset management fees, Mercer Investment Consulting reported Tuesday in its latest fee survey.

Overall, Mercer’s analysis of more than 25,000 asset management products from more than 5,000 investment firms detected growing pressure for such fee negotiation, including a greater willingness among managers of hedge funds, direct private equity and infrastructure funds to negotiate fees.

Less than a third of managers had increased their fees, and those who did were particularly focused in small cap equity outside the United States. U.S. small cap equity management fees tended to decrease.

The drop in fees reflects a sea change in the world of retirement investing as defined contribution (DC) plans such as 401(k)s overtake traditional defined benefit (DB) pensions, according to Divyesh Hindocha, global director of consulting for Mercer’s Investments business.

"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 said in a statement. “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.”

What was once a “2 and 20” alternatives industry standard of charging 2% of total asset value in addition to 20% of any profits earned continues to move toward “1.5 and 20” as supply and demand dynamics have led managers to be more flexible in negotiating fees, Mercer said.

The majority of managers studied in 2012 left fees relatively unchanged, according to Mercer.  Where fee reductions occurred, the greatest drops were in equity mandates. Retail equity funds tended to lower fees more than their institutional and segregated counterparts.

Mercer’s 2012 Global Asset Manager Fee Survey, the fifth such biennial report, covers asset managers in a range of geographies and products in both pooled and separately managed accounts. Copies of the survey can be obtained at www.mercer.com/globalfeesurvey.

Read Record Pension Gap Threatens 2013 Company Earnings: Mercer at AdvisorOne.

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