Emerging market equity firms charge highest fee

LONDON — Emerging market equity managers charge the most of all traditional asset managers, according to a global survey of institutional asset management fees published this week by Mercer Investment Consulting Inc.

The lowest published fees are for fixed-income portfolios and for government bonds in particular, said Marianne Feeley, senior investment manager researcher, in London.

The highest fees are generally charged in asset classes where managers have the greatest ability to add value and in some cases, such as small-cap stocks, where the money manager may face tight capacity constraints, she said.

The average fee for a $50 million emerging markets equity separate account was 95 basis points; the average dropped to 90 basis points on a $75 million mandate.

Mercer hasn't yet done any research comparing the cost of asset management with the fee charged. "Based on anecdotes, we would expect research costs to be higher for emerging markets than for more liquid markets. In terms of how the fees are generated, it comes partly from the cost side and also from what the market will bear," said Ms. Feeley.

The survey, the first done by Mercer, is based on published fee schedules for traditional asset classes offered by the 2,000 firms in Mercer's global investment manager database.

The actual fees negotiated in individual mandates are often lower than the published fees, but Ms. Feeley could not say by how much.

The survey — which covers the United Kingdom, Europe, United States, Canada, Asia, Japan, Australia and New Zealand — also found fee disparities for the same strategy based on the domicile of a fund.

Global equity funds domiciled in the United States were 10 basis points more expensive than those based in the United Kingdom. But where initial fees are 80 basis points or more, there was generally more room to negotiate downward for U.S.-based funds than for those based in the United Kingdom.

A $50 million placement into a Luxembourg-domiciled U.S.-dollar-denominated emerging market fund carried an average management fee of 120 basis points. But the average fee on a $50 million placement in a pound-denominated U.K. open-end investment company, also an emerging market strategy, was 82 basis points.

Ms. Feeley said it might be possible for institutional investors to take advantage of the price differences between similar funds with different domiciles. "But you would have to consider the different types of fund structure and other implicit costs such as cross-border tax," she said. "But to the extent that there is global integration, any fee structure that is inefficient will face more pressure."

A single global equity fund was generally more expensive than the underlying constituent regional funds. Ms. Feeley attributed this premium to the additional asset allocation decision that is applied to a global fund.

Across the regions, fixed-income fees averaged 25 basis points, with less paid for government bonds and more for high-yield and credit-driven strategies.

Fees on index-based fixed-income mandates are between 15 basis points and 30 basis points lower than actively managed strategies. And fees on index-based equity strategies were 45 to up to 70 basis points lower than active strategies.

Mercer found little variation in fees based on the style of the mandate. The costs of U.S. equity growth, value and core portfolios, for instance, are similar.

However, the average fee for a $50 million U.S. large-cap core equity separate account was 56 basis points, while a $50 million international core equity portfolio cost 67 basis points.

Fees for a U.S. small-cap equity fund ranged from 82 basis points to 88 basis points on a $50 million separate account. A large-cap equity fund of the same size would carry a price tag of between 55 basis points and 58 basis points.

Ms. Feeley believes this distinction in fees is due to relative illiquidity in small-cap stocks. The higher fee might also be, in part, compensation to the money management firm which, facing capacity constraints inherent in the asset class, might be forced to close to new business with limited assets under management.

Fees for regional strategies varied markedly across different regions, depending on the liquidity and risk/return profile of the underlying market. Equity funds covering Asia (excluding Japan) were the most expensive, with fees averaging 75 basis points, and Canadian equities were the cheapest, with fees ranging between 30 basis points and 40 basis points, depending on style.

It was generally cheaper to use a pooled fund for home-market equities, for mandates smaller than $25 million. Beyond that threshold, separate accounts had similar or lower fees, said Ms. Feeley.

Fees appeared higher for pooled global and emerging market funds than for separate accounts, as pooled mandates generally included custody costs that were charged separately for separate accounts.

But manager fees were just one aspect of selecting a money manager, said Ms. Feeley.

Mercer evaluates managers on returns excluding fees, but it is important for plan sponsors to compare manager fees within an asset class to see which are charging higher fees and get them to justify that premium, said Ms. Feeley.

"This survey is for both pension schemes as a reference point when they negotiate fees and for money managers who want some kind of peer group comparison," said Ms. Feeley.