Craig Mercer

The growing strength of popular investment markets has put increased pressure on investment managers to produce new fee models that offer more attractive returns to investors and protect the industry against intervention by the regulators, according to a new white paper by Australian investment manager Remerga.

The white paper, Fee innovation in investment management overdue, calls for a fresh approach to innovative free structures as the total cost of investment management rises, despite a drop in the average headline fee rate.

Chief Investment Officer at Remerga, Craig Mercer, said that the typical fee structure is skewed and that managers are incentivised to take less risk and aim for index-like returns.

“The common practice of charging management fees based on asset size is deeply entrenched in the industry but the practice does not take into consideration the time horizon of the investment,” said Mercer.

“For an asset manager, the stability of the capital base is a valuable tool. It allows the manager to not only build a more sustainable business but, crucially, it allows for longer-term investment decisions.

“Current practice does not reward the longevity of committed capital. Given the clear advantage that a long-term investment horizon offers, it would seem logical to encourage long-term capital commitments. Longevity of capital should be rewarded over and above size.”

The lack of innovative fee structures is proving to be a global issue, with a report by the UK’s Lane Clark & Peacock (LCP) revealing that the asset management fee for a £50 million active global equity mandate has increased by 70 per cent since 2011.

If the industry does not innovate and improve new fee structures, there is a chance regulators will intervene and impose changes. The LCP report discusses the UK’s Financial Conduct Authority (FCA) review of the UK wealth management industry, particularly the recommended changes to fee structures made by the regulator in its interim report.

According to the report, the FCA is taking a firm stance against the investment management industry, saying that industry margins are too high, investors don’t get any scale benefits, some active managers are not truly active and transaction costs are not transparent. Remerga aims to provide fee structures that address the growing trend of regulator intervention here in Australia.

“Our solution at Remerga is to introduce a fee structure that rewards investors for making long-term investments. Investors in our Emerging Markets Sustainable Leaders Fund will have their fees reduced after three years and then again after six years,” said Mercer.

“Under this performance fee option, the management fee is 0.45 per cent a year for the first three years, dropping to 0.4 per cent in years four and five, then dropping further to 0.35 per cent in year six and onwards”.

The performance fee is 10 per cent of the net excess return above the MSCI Emerging Markets (Net) Index and all additional expenses, with a high water mark,” he said.

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Craig Mercer

A strong focus on governance standards is the key to successful investing in Emerging Markets (EM), according to the principals of a new specialist EM investment manager, Remerga.

Remerga’s first fund, the Emerging Markets Sustainable Leaders Fund, is open for subscriptions and offers Australian investors access to a concentrated portfolio of stocks in markets as diverse as South Africa, India, Poland, Egypt and Brazil.

Remerga’s first fund, the Emerging Markets Sustainable Leaders Fund, is open for subscriptions and offers Australian investors access to a concentrated portfolio of stocks in markets as diverse as South Africa, India, Poland, Egypt and Brazil. Remerga makes its stock selection decisions using a combination of quantitative factors and deep due diligence on sustainability or ESG (environmental, social and governance) factors.

Remerga makes its stock selection decisions using a combination of quantitative factors and deep due diligence on sustainability or ESG (environmental, social and governance) factors.

“Emerging markets investing is fraught with complex challenges,” says Craig Mercer, Remerga’s Co-founder, Director and Chief Investment Officer.

Mercer says 30 per cent of the emerging markets benchmark is made up of state-owned enterprises, which may have objectives that do not align with those of minority investors.

“We focus heavily on alignments of interest with investors,” Mercer says.

Other issues investors face in emerging markets are inconsistent adherence to the rule of law, uneven sustainability practices and high investment costs. Mercer heads the Remerga portfolio management team with Warwick Johnson, Remerga’s Co-founder and Director.

Mercer heads the Remerga portfolio management team with Warwick Johnson, Remerga’s Co-founder and Director.

Mercer started working in the investment industry in 1999. His roles have included Head of Global Emerging Markets Research for Watson Wyatt (now Willis Towers Watson) and Head of Risk Management at Dalton Investments LLC. Johnson has worked in the industry since 1984. He has served as the Head of Asset Management for HSBC in Japan and founded Optimal Fund Management in 1999. Optimal is a 50 per cent owner of Remerga.

Johnson has worked in the industry since 1984. He has served as the Head of Asset Management for HSBC in Japan and founded Optimal Fund Management in 1999. Optimal is a 50 per cent owner of Remerga.

“The fund has been constructed with limited reference to its benchmark, the MSCI Emerging Markets Index. The portfolio is typically comprised to 20 to 40 securities, with consideration being paid to concentration issues and a wide range of risk factors when building our portfolio,” says Mercer

Remerga will be an active shareholder, engaging with companies on key issues when it is deemed necessary in the interest of members. Mercer and Johnson believe “it is essential to have an engagement process that can aid in enhancing value over the long term”.

“A focus on sustainability is the only way to achieve superior risk-adjusted returns in the emerging markets,” Mercer says.

Mercer cites the findings of a wide range of studies of ESG, which agree that that companies with high ESG ratings have lower costs of capital. Sustainability focused companies outperform their counterparts in both financial performance and market returns. While their own research has identified the long-term underperformance of state controlled companies in emerging markets.

Governance factors that Remerga takes into consideration include assessing alignments of interest, shareholding structures, audit quality, compensation policies, board independence, capital discipline, related party transactions and controversies involving the company. Other ESG factors that Remerga takes into consideration include an assessment of labour practices and a wide-range of environmental factors.

Remerga has a low investment management cost structure, with fees starting at 45 basis points (plus a 10 percent performance fee for returns in excess of the benchmark) in year one and declining in subsequent years.

Mercer says the fees are a reflection of Remerga’s desire to offer value for money and also reflects where the industry is moving to in terms of fees.

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