Pension funds should “accept alpha decay” and not expect active asset managers to outperform the benchmark for more than three or four consecutive years.
In warning that changes in markets and in investment firms over time would compromise the ability to generate long-term sustainable alpha, Günther Schiendl, chief investment officer of the €4bn VBV Pensionskasse, Austria’s largest multi-employer pension fund, advised investors to build “reasonable” return expectations and to be prepared to change their line-up of active managers over the years.
“Sticking with a bad manager might lead to greater costs than those incurred by switching managers,” he said.
He maintained that traditional long-only active managers represented good value if they delivered 150-200 basis points of outperformance on an average annualised basis. He also claimed active managers were partly responsible for promoting unreasonable return expectations.
Helena Morrissey chief executive officer of Newton, an active management company of BNY Mellon Asset Management, contended that changing active managers on a frequent basis would be a “recipe for disaster” on account of high switching costs.
While urging investors to allow sufficient time for “particularly good investment ideas” to bear fruit, she encouraged the use of performance fees to align the interest of investor and manager.
“We have performance fees on a rolling three or four-year basis and if results are poor, we credit back to the client’s account until we have outperformed again. If it is a short-term blip in our long-term consistent results, we have an interest in rectifying the situation.”
Antoine de Salins, chairman of the manager selection committee of France’s pensions reserve fund, the €28.9bn Fonds de Reserve pour les Retraites (FRR), believed it was not reasonable to expect active asset managers to provide consistent outperformance of more than 50 basis points net of fees. This he considered a satisfactory result on an average annualised basis for an institutional investor with a large portfolio of active managers (FRR has 40 active managers).
Tom Brown, European head of investment management at KPMG in the UK, said investors should work closely with an active manager to gain a thorough understanding of the investment process and to become “more aware” of the manager’s ongoing performance.
“So if there is a need to change,” he added, “investors are doing so for good reason and not because they think they need to churn their active managers every two to three years simply because they think it is good to change. That is the wrong answer for investors. There is a switching cost.”
TURN TO PAGES 34-36 FOR MORE ON ACTIVE MANAGEMENT
