Does paying more deliver more performance? Chris Sier on VFM

You get what you pay for, right? As far as fund management is concerned, this old adage does not quite ring true, although as ever there are some caveats.

Looking at the cost data I have collected on behalf of pension schemes so far, there are six sub-asset classes that showed a positive correlation between total cost and net performance.

Four of these six are fairly obvious. As illiquid assets classes, infrastructure, private equity and private debt, tend to have performance (ie, carry) built into their valuations, which are internal rate of return calculations and therefore a form of estimate.

Hedge funds are also generally performance fee-geared. The other two are fixed income (other) and active UK equity.

Table 1: Does fund performance improve if you pay more?

Performance quartile of lowest quartile mean total cost Performance quartile of highest quartile mean total cost Pay more, get more? Performance costs as a % of total costs
Active global equity Top Bottom No 1%
Insurance-linked securities Top Bottom No 1%
Active emerging market equity Top 3rd No 0%
Passive emerging market equity Top 3rd No 0%
Passive UK equity Top 3rd No 0%
Passive European equity Top 3rd No 0%
Passive Asian equity Top 3rd No 0%
Passive North American equity Top 3rd No 0%
Diversified growth funds Top 3rd No 0%
Active all-equity 2nd Bottom No 1%
Multi-asset 2nd Bottom No 2%
Other alternatives 2nd Bottom No 6%
Illiquid credit Top 2nd No 31%
Passive all-equity 2nd 3rd No 0%
Passive global equity 2nd 3rd No 0%
Real estate 2nd 3rd No 0%
Fixed income (emerging market debt) 2nd 3rd No 0%
Fixed income (gilts) 2nd 3rd No 0%
Absolute return bonds 2nd 2nd No 0%
Fixed income (cash) 2nd 2nd No 0%
Fixed income (corporates) 2nd 2nd No 0%
Fixed income (credit) 2nd 2nd No 12%
Infrastructure 3rd 2nd Yes 46%
Fixed income (other) 2nd Top Yes 2%
Active UK equity 3rd 2nd Yes 3%
Hedge funds 3rd Top Yes 36%
Private debt 3rd Top Yes 47%
Private equity 3rd Top Yes 39%

For both of these, the differences in net performance between the lowest and highest quartiles of cost were marginal, and at the border of their respective quartile boundaries. So the data cannot be said to support the hypothesis that spending more will generate better performance within an asset class.

Reflecting on this, it occurs to me that the ‘assessment of value’ reports that asset managers now need to prepare might be extremely useful for asset owners if they can demonstrate where a manager sits on the cost/performance landscape.

Assessment of value is a euphemism for value for money, and you cannot assess this unless you know at least the performance – which is one measure of value – in the context of cost, which is the only measure of money.

In the absence of any direct instruction on best practice for writing assessment of value reports, demonstrating value by showing comparative quartile cost and performance for a fund is perhaps a good starting point.

Dr Chris Sier is a Founder of AgeWage , Chair of ClearGlass Analytics and led the FCA’s Institutional Disclosure Working Group

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Does paying more deliver more performance? Chris Sier on VFM

  1. Thanks Henry and Chris.
    Firstly, hope you had a good Christmas and are well.

    I think these numbers may be interesting, but I am not sure how to read these figures and what they are based on.. How provisional are they? For example, I have some questions that would help me interpret them, if you’re able to please reply.

    What funds do the numbers relate to?
    What time period do they relate to?
    How many funds are in the sample used for each comparison?
    What benchmark comparisons are being used for quartiles?
    How are the cost data calculated – e.g. is it reported TER, does it include other costs, transactions etc?

    Thanks for all your hard work.
    Best wishes

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