Donny Hay , a client Director at Pitman’s Trustees, argues cogently in this week’s Pension Expert- about recent work by Chris Sier and colleagues
the cost assessment template focuses on the numbers, but says nothing about whether those costs represent good value for investors. The context is missing; its inclusion is crucial to avoid a race to the bottom, where literal costs dominate over value for members and investment outcomes
I agree that we need to find a proper measure for value, Donny concludes
Asset managers, whether active or passive, will need to fight their corner to demonstrate that those costs represent good value.
Pension schemes will undoubtedly benefit from this unbundling. Clearer disclosure of costs will empower pension scheme trustees to grill their asset managers on all charges and ensure that trading is optimal and in the best interest of their members.
Fund costs will fall as managers absorb more costs, such as broker research, and there is likely to be an increased use of performance fees as active managers seek to recover these costs
I’m not clear why mean reversion applies to manager’s fees (though Thomas Philippon has argued that it does! The FCA claims that the average margin of an asset manager is 36%, it might equally be argued that rather than find knew ways to skin us, the Asset Managers might tighten their belts a couple of notches!
Value – what value!
Fund managers find it a lot easier to claim they add value than to demonstrate it. This is not necessarily their fault. Since we started believing that “past performance is not necessarily a guide to the future” fund managers have become divorced from failures and successes in the past and increasingly rely on brand awareness among customers and intermediaries.
There is another race to the bottom going on here as brand managers look for the bottom of their branding budgets (a thankless task it seems!)
It is all too easy for a fund manager like Newscape to issue a fund prospectus as disastrous as that for the 5Alpha Conservative Fund but to prosper because of a judicious sales and marketing strategy. In terms of brazen carnality , the supplement is the best example of fee-gouging I have ever read, yet it is a perfectly legal document!
If there is an exemplum for what Donny is saying, the fate of the Active Wealth Management pension transfer -bank, is it!
The value of the 5Alpha Fund , the Vega Algorithm DFM or the advice of Active Wealth Management is in its perceived value. We have no measure to judge it by since 5Alpha is new and we cannot judge it by its predecessor (Strand) since that fund no longer exists. The value of Active Wealth Management is in the perception of its clients who were introduced in the main by Celtic Wealth Management. It is arguable whether the value of this introduction derived from sausage and chips or chicken in the basket, though Clive Howells has argued forcibly in his letter to Frank Field MP, that it was sausage and chips.
This “reductio ad absurdam is another race to the bottom. If value can be reduced to silly conversations about marketing inducements, then the value for money debate is lost.
We need a universally accepted framework to understand “value”.
Just as cost needs the context of value, so value needs the context of cost. But we need to be able to measure value and cost independently and we are now – with Chris Sier’s and Mifid and Priips, close to getting full and standardised cost disclosure.
We need the same for value disclosure. For all their hollering for us to consider value, I don’t see much forthcoming over than fund managers claiming to be “value hunters” and advisers comparing nutritional inducements.
The objectives of a fund must be given a value and the fund’s ability to meet those objectives, measured by risk-adjusted fund performance, must be another measure.
If a fund aims to achieve 2% outperformance of a benchmark and does so without taking undue risk, let’s praise it. Providing that is that the benchmark was vigorous enough in the first place!
If a fund takes too much risk to achieve its objective, let’s mark it down for that. If it takes no risk but fails to deliver – let’s mark it down. If the benchmark is akin to stuffing the money under the mattress- let’s mark it down.
Cost is – in the final analysis – only one of a number of risks a member takes, cost effectively raise the bar for value. But cost is easily measurable and comparable. It is one risk that can be taken off the table (to the extent that funds bear unnecessary costs). The risk of paying others too much is one that any sensible person can see is “unrewarded”.
The ball is in the “value-hunter’s” court
While it is right that the Investment Association is given a low place at the costs table, it is also right that they be fully involved in the value debate.
Provided we have nailed cost, then value is a “sunny upland” and I hope that the IA will be getting on with a proposal for us to measure value which can allow us to complete value for money comparisons.
Value hunters should know what value is and they should be able to tell us. Whether it is through the delivery of “alpha” – whatever that is, or “beta”- which I find easier to understand, the fund management industry must tell us what they want the rules to be.
As Donny puts it;
The context is missing; (value’s) inclusion is crucial to avoid a race to the bottom, where literal costs dominate over value for members and investment outcomes