Dr Chris Sier
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