Ignites Europe

January 29, 2013 12:55 pm

Retail equity funds under price pressure

Ignites Europe

Ignites Europe, a Financial Times publication, provides news and analysis of the European fund industry. http://www.igniteseurope.com

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Retail equity funds are among the only products that have seen downward price pressure over the past two years, according to a Mercer report.

These funds “have tended to lower fees more than their institutional and segregated counterparts”, says Mercer, which examined global data on more than 25,000 investment strategies from over 5,000 managers.

Mid-cap value US equity retail funds recorded the highest average decrease in fees since 2010 (down 0.22 per cent), followed by international equity – World ex US/EAFE small cap equity (down 0.20 per cent).

Other asset classes to see a drop in fees since 2010 include eurozone debt, emerging markets equity and emerging markets debt.

Europe was identified as one of the cheapest regions in which to invest, with the average fee for funds investing in the region standing at 0.4 per cent. This compared to funds investing in the US, which had an average fee of 0.6 per cent and Japan with 0.7 per cent.

Asset managers have also lowered fees across a number of their alternative products in the past two years as firms look for ways to keep a tight grip on investor assets.

Mercer says alternatives was the only asset class “that has demonstrated material changes” to fee levels since 2010.

The consultancy firm notes that hedge funds’ common 2 per cent management fee is increasingly moving to 1.5 per cent, while the 20 per cent performance fee remains unchanged.

A growing number of hedge funds are also offering lower fees for longer lock-up periods.

“Over the past few years the industry has continued a rationalisation in price as supply-demand dynamics have meant managers are more willing to negotiate on fees,” says the report.

However, charges for other asset classes have been left “relatively unchanged”.

Divyesh Hindocha, global director of consulting for Mercer’s investments business, says: “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.”

Around a third of managers have also increased fees in strategies such as UK equity, Hong Kong equity, eurozone high yield and Swiss fixed income.

The report found that euro-denominated retail emerging market funds came on top of those asset classes and funds, with the highest median total expense ratio at 2.24 per cent.

Also identified among the most expensive products were retail SRI funds, with annual fees ranging from 0.4 per cent to 1.8 per cent, according to Mercer.

Meanwhile, eurozone fixed income exchange traded funds were among those vehicles with the lowest TERs, with an average of 0.16 per cent.

Mercer says so-called smart beta strategies are likely to put pressure on firms to lower fees.

Such strategies differ from traditional market capitalisation weighted benchmark products in that they are often based on alternative indices and apply a different weighting method to stocks.

“Some active manager strategies do not constitute a true capture of alpha,” says the Mercer report.

“We believe that the evolution of this approach will result in a greater scrutiny of fees charged for the generation of alpha.”

The predictions on smart beta follow similar sentiments expressed recently by industry experts, who said smart beta ETFs “could put the cat among the pigeons” in the active management space.

As much as $5,000bn is thought to be invested in smart beta, with ETFs accounting for a sizeable portion of this figure.

Ossiam, the ETF subsidiary of Natixis Global Asset Management, is one of the firms leading the charge with smart beta, and has a range of products based on two smart beta strategies: equal weight and minimum variance.

Lyxor, db x-trackers, SPDR ETF, PowerShares and Pimco have also recently added smart beta products to their lineups.

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