Value for money is coming under increasing focus - but what proportion of investors feel empowered to define and then measure the value for money they have received?
Value for money is coming under increasing focus, but it means different things to different people. Regulation and technology are driving the increase in transparency and cost efficiency – but what proportion of investors feel empowered to define and then measure the value for money they have received?
Focus on outcomes
Value for money will always be subjective. An investor’s investment needs may be straightforward, nuanced or complex. Beliefs may need to be incorporated. Risks such as currency or volatility may need to be offset. Return expectations may be revised as long-term market conditions shift.
And value for money can only be judged in hindsight. An investor in a low-cost passive fund who has enjoyed the past decade’s beta rally will say they received excellent value for money. But one who paid a bit more for a volatility-constraining strategy over the same period may have received equal value from the peace of mind this approach delivered.
The best route to understanding value for money at outset is to define the desired investment outcome. By identifying clearly what an investor wants over a timeframe, the investment objective can be determined. Once this is established, the next step is finding the blend of investments to meet that objective.
Assessing value for money
We define value for money as meeting the investment objective in the most cost-effective way. An asset manager’s role is to understand the investor’s goals and constraints. Outcomes are the ultimate goal but risk is the overriding consideration.
It’s about finding the right balance through a combination of different strategies and factors, including long-term market exposure, strategic tilts, dynamic allocation and security selection.
It may be that an investor can get a more cost-effective allocation to one market or strategy and free up fees for a higher-alpha investment approach where it is really needed. Or it may be that broad-based market exposure is complemented by a risk-mitigating factor.
Investors are now using a wider variety of products that span different investment strategies, return targets, levels of risk and cost expectations. They are also asking with ever more precision how much each additional layer of investment skill should cost.
With margin pressures, fee caps and other restrictions on portfolios, this precision will come more to the fore and is where portfolio analytics come in.
A new breed of alpha
So, how does active management – or alpha – fit into all of this? The growth of indexing and factor-based investing has been a fantastic disruptor to asset management. This era of unprecedented technological advancement and ‘big data’ also brings an opportunity to enhance returns.
Alpha-seeking strategies can now be deployed with much more precision. The expectations and pricing of these strategies is becoming ever more granular as investors discriminate between different sources of excess return such as smart beta, low-cost alpha or high-conviction alpha.
It boils down to assessing the cost of each additional layer of investment skill above an index tracker.
How much more for hedging? How will the cost of reducing volatility or tilting to factors change? What effect will ESG have on overall pricing? What will be the cost of strategic allocation and how valuable is it to have a team making dynamic stock, sector and asset allocations?
And from an outcomes lens, how much more is it worth paying for every 1 per cent of alpha delivered?
Michael Gruener is head of EMEA Retail at BlackRock.