Fund managers have come under increasing pressure to justify the value they are delivering and therefore the fees they are charging investors.
This is especially true for Active fund managers when compared to their passive competitors as they charge significantly less for accessing their products.
An (active) manager added value can broadly be separated into 4 categories:
- Market exposure:
- this is very simply the fact that a fund invest in a certain asset class / market and provide this exposure.
- Very easy to replicate with cheap (if not “free”) passive product.
- What has been to date mostly commoditized by passive providers and where the fee pressure is highest
- Static Standard Factor exposure:
- This refers to common exposure in the portfolio (including beta to market) which can be replicated cheaply – mostly through ETF / Smart beta ETFs
- If this exposure is static in the portfolio and a cheap(er) product provides similar exposure, the fund manager is exposed to being under-cut
- Tactical Standard Factor exposure:
- Tactical exposure to “factor” in the portfolio
- Managing such exposure can’t be replicated by a “passive” exposure and returns derived from such exposure should be allocated to the fund manager
- Non standard factors &/or security specific returns:
- This is what is left after extracting 1 to 3
- It can include non standard / transient factor exposure which are not readily available in cheap / passive form
- Security specific returns (i.e. idiosyncratic) should come in this section
- Separating the non standard / transient factor exposure and the true security specific returns is not possible in this simple framework
This is not new & has been advocated by sell side houses in the last few years but there seem to be limited application of such framework despite its simplicity