Watson Wyatt reignites debate on rising manager fees and charges

Watson Wyatt is again pressing for debate on manager fees and charges, with the release of an international research note on the rising costs associated with funds management.

Watson Wyatt orchestrated a vigorous discussion with managers in Australia last year, as part of an annual dialogue, at which the consulting firm voiced its concern about increasing manager fees and other charges, particularly in the alternatives sphere. The latest research note, prepared in London, estimated that the total annual investment costs for large pension funds around the world had risen by 50 per cent in the past five years. “A key reason for this is the rise in investors’ focus on alpha, which has increased their appetite for alternatives, such as hedge funds, private equity and real estate,” the note says. “Hedge funds typically charge an annual base fee of 1-2 per cent on the value of the committed capital, plus a 20 per cent performance fee, and private equity fees are similar. This is far more than the typical annual fees charged by traditional long-only managers, which would often be below 50bps. “Investors naturally assume that they are paying these high fees to reward manager skill, or alpha. But in most cases they are wrong. Instead, they are paying alpha fees for beta performance, because the main driver of returns in recent years has been the strength of the markets. “This has encouraged managers to leverage their portfolios to boost returns, which means that investors are often paying up for leveraged beta – market returns multiplied by gearing.” In Australia, Graeme Miller, the head of investment consulting, said: “Australia was not included in the study five years ago, so we can’t make accurate observations [about rising fees and charges]. However, my instincts are that Australian funds’ experience has been similar to global funds; that is, as funds have moved their asset allocations to include more alternative assets, so their fees have increased.” Work by SuperRatings in Australia last year showed that total fund MERs had increased by 8-10 per cent for large funds in the preceding 12 months, which was the most significant annual increase on record. These figures, however, are not strictly comparable with those of Watson Wyatt.