How do you demonstrate value for money to your clients? Is it the amount of time you are willing to spend on them? The depth of expertise and support provided? Or is it the quality of outcome you achieve?
In asset management, value has until now been a somewhat nebulous concept – something that firms often say they deliver without being too specific about what it entails. But now the FCA’s Asset Management Market Study has put the issue of value for money firmly in its sights. And we don’t think it’s a moment too soon.
So how should we measure value for money? The FCA has said it considers value for money for asset management products typically to be some form of risk-adjusted net return. This can be broken down into performance achieved, the risk taken on to achieve it and the price paid for the investment management.
We would frame it even more specifically. When investors are paying a fee for active asset management they are usually looking for any of three things: to achieve a higher return than the market, to achieve a market-like return but at lower risk than the market and/or to achieve a higher sustainable income yield than either passive investing or risk-free assets such as cash deposits can deliver.
In an ideal world, the fee for active management should be predicated on a fund’s ability to fulfil any of these core objectives (net of fees, of course). The thorny challenge is that whereas you can road test whether a car can deliver 60 miles to the gallon beforehand or whether that holiday villa is good value because it will comfortably sleep six, achieving value for money from unpredictable financial markets has to be a retrospective judgement.
Of course, value for money could be judged by periodically assessing an investment’s net-of-charges performance and how these measure up against the investor goals above. The question then is over what period should a fund’s results be judged? If short-termism is deemed to be bad both for investors and the companies they invest in, is it unreasonable to allow a fund manager five or even 10 years for their investment strategy to realise returns?
Indeed, one myth that needs to be dispelled is that value in active asset management equates to a lot of frenetic portfolio activity. Investors need to be able to distinguish between managers who frequently churn their portfolios for no-added benefit and those that deliver better value through a longer-term buy and hold mind-set that doesn’t rack up lots of trading costs. The single, all-inclusive fee proposed by the FCA should help to achieve that.
But there are other aspects of active investment on which time and money is well spent. At Aberdeen, a major proportion of our resources go into proprietary research. We use our global presence to maintain teams across local markets that can meet and analyse companies first hand and then share and assess what they’ve learned with their peers in order to put every opportunity in context. This takes time and rigour but is key to building long-term, high-conviction portfolios.
Equally important is the time spent on stewardship – being an active shareholder, engaging with management and encouraging every company we encounter to adopt best practice across all their activities. Corporate engagement is not just about shareholder activism but diligent, collegial work whose value can take years to emerge in terms of share price performance (although it generally does). But it is vital that major buy-side investors have the time and resources to use their influence in this way if advances in environmental, social and governance (ESG) standards are to continue.
That brings us to the value of active asset management to financial markets themselves. Cap-weighted index-tracking may be gaining ground rapidly in the face of growing cost pressures. But without the price discovery activities of active managers, share prices may become completely divorced from fundamental value with all the associated risks that involves. As the FCA notes: accurate pricing of assets allows both equity and debt capital to be efficiently allocated to the firms that would generate the greatest economic returns to society. Active asset management has a value that goes well beyond the immediate returns it generates for investors.
Of course, a lot of this is of little interest to the average retail investor. Like any purchase, they will ultimately measure value for money in terms of how successful an investment has been in achieving the specific objective for which it was bought – whether that’s meeting the school fees, paying off the mortgage, funding retirement, or simply beating the return on their savings account. So if value for money is going to be a genuine benchmark, then we need to acknowledge far more explicitly what investors want to accomplish in real life and tailor fund outcomes in line with that. The FCA is chairing a working group to explore how funds can provide retail investors with clearer and more useful objectives – and this is something that is potentially quite exciting: by being bolder and more imaginative in how we frame WHY an investment fund invests (rather than focusing on how it invests) we can make their value resonate more strongly with savers.
Value for money should ultimately be judged on investment outcomes. But in the immediate term, it will inevitably be judged on price. Being able to offer investors the full spectrum of investment opportunities from pure low-cost passive funds to rules-based smart beta, all the way up to full active investment could be the best way to let investors tailor investments to what best fits their concept of value for money.
The true value of an investment generally only emerges over time. But offering investors a clear and genuine choice in terms of investment approach, fund objective and price is the best first step in making sure what they value most can be delivered.