What are you paying your asset manager for?

In many respects, asset management is a very traditional industry. It is not a space of great innovation and rapid change.

To some extent this is understandable, and desirable. Investors take great comfort in consistency.

However, recently people are starting to ask more questions about the way that asset managers operate. The rise of passive investing has started to open up broader conversations about what asset managers should actually be trying to achieve, and what investors should be paying for.

Speaking at an Investment Solutions seminar in Cape Town, Deb Clarke, the global head of investment research at Mercer said that this is an industry ripe for disruption. One area where that is already happening is fees, where low-cost index tracking and factor investing products are drawing the majority of new flows.

However, she argued that discussions around fees still have to mature.

“Fee pressure is quite emotive,” Clarke said. “To me the point is not investing at the lowest fees, but whether you are getting value for money.”

The continuing move to low-cost index trackers is clearly part of that. However, she suggested that this does not necessarily mean that all active managers have to reduce their fees as well.

In fact, she said that those managers who are able to deliver true active returns may in time be able to increase their fees. She feels that investors will be willing to pay a premium for funds that have a proven track record of producing better risk-adjusted returns.

Clarke also pointed out that the investment world is becoming more transparent. In the past, there was a sense of mystery about how asset managers delivered returns, as if they achieved results through some sort of alchemy.

But as we develop a better understanding of the risk premia or factors that are responsible for driving the majority of returns, we are also demystifying what active managers actually do. Almost all excess return can be attributed to exposure to factors like size, momentum or value.

Since these factors can be identified and isolated, it is possible to get systematic exposure to them through rules-based, quantitative portfolios. And as artificial intelligence develops, the ability of these portfolios to identify and adjust to market changes will improve too.

“Today when we research firms we talk to investment managers,” Clarke said. “It may be in five years time we are talking to data processors.”

Muitheri Wahome, the head of investment advisory at Investment Solutions said that another significant change in the asset management world is that a number of firms are re-looking at what exactly it is they are offering clients.

“They are asking the question: what are we solving for?” Wahome said. “Increasingly we are realising that financial well-being for our clients is not just about the return of the retirement fund, but whether we are meeting their requirements.”

These requirements differ between individuals, and asset managers therefore need to consider what solutions they are offering and if these meet the necessary needs.

“Increasingly managers need to be relevant in that conversation, which is not necessarily about whether you beat the All Share Index, but rather whether you have met an income-related need,” Wahome explained. “Will my clients have sufficient income at retirement? Am I offering a solution that protects them against the vagaries of inflation?”

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