Asset managers look to alternative assets to justify management fees

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Asset managers are responding to fee compression by diversifying their fund ranges into alternative asset classes, which some believe will be able to command higher fees, according to a new survey from consultancy Alpha FMC.

The Product Trends Survey shows that 60 per cent of asset managers believe there will be continued pressure to reduce fees for ten years or more, with regulators, institutional clients, and competitors driving a race to the bottom for asset management fees.

Managers predict that traditional asset classes will be hit the hardest, with mature equity feeling the most pressure thanks to growing demand for passive vehicles and low-fee products, such as smart-beta. Government and corporate bonds were deemed the second hardest-hit asset class, with multi-asset fees also expected to feel the heat as fees tend to range from around 65 to 290 bps.

By contrast, only 29 per cent of respondents anticipated fee pressure increasing in any alternatives products, which Alpha FMC suggests may correlate with the fact that 60 per cent of the asset managers surveyed cited an alternatives asset class featuring as one of the top three priorities for product launches in 2020. 

Joe Docker, executive director at Alpha FMC, says: “Recent high-profile examples of managers receiving significant management fees whilst delivering poor performance has exacerbated attention on fees. Pressure has grown for managers to better align incentives with customers and pass on economies of scale. The latter can be achieved with relative ease, but there remains a significant challenge in agreeing how best to align incentives, in addition to the operational complexity of delivering novel fee models.”

ESG was also seen as an opportunity for active managers, with 40 per cent ranking ESG products as one of their top three priorities for product launches in 2020. With the threat of passive strategies still looming, specialist investment approaches present an opportunity for active managers to justify their fees. 

A quarter (25 per cent) of respondents believe that specialist approaches, such as ESG, can command higher fees today, primarily due to higher running costs incurred by the need for specialist resource. However, for ESG, no respondents believed they would continue to be able to justify higher fees in three years’ time.

“It is interesting that asset managers are looking to launch products in asset classes where they see the least chance of fee compression. However, it is worth noting that many do not anticipate this trend, for example in ESG products, to last very long. Given that higher running costs are currently the driver for higher fees, asset managers will need to reduce their cost base in order to reduce fees in the medium term,” says Docker.

In future, most managers predict that tiered and fixed-all-in fees are the most likely approaches to be introduced for new and existing funds.