Where management fees are concerned, the universe seems to be unfolding as it should. Earlier today, Mercer Investment Consulting released the results of its annual survey of global management fees. The bottom line: the market doesn’t just pay for alpha, the investment management market is the alpha market. It seems the more alpha is produced, the higher the fees. But rather than describing this situation as “paying for higher quality”, we would argue customers are simply buying more “product” (i.e. more units of alpha). In other words, the price per unit of alpha may actually be stabilizing (or falling) for all we know.
Says Mercer’s press release:
“According to Mercer’s study, which covers 164 traditional and alternative institutional investment strategies, fees are highest in classes where asset managers have the most potential to outperform.”
These classes, according to the study, are the ones that can be described as most inefficient (e.g. emerging markets). It comes as no surprise then, that fees are lowest in highly liquid, mature and efficient markets such as global fixed income.
Divyesh Hindocha, worldwide partner and global director of consulting at Mercer Investment Consulting said “A comprehensive review of performance should include cost analyses on an absolute basis and also relative to asset class peers.”
We submit that “relative to asset class peers” can be shortened to one word: “alpha” – particularly where those “peers” are actually passive replications (e.g. ETFs).