Professional Pensions asked an audience of over 100 trustees and scheme managers to set their asset managers a New Year’s resolution.
Their answer was clear.
Be more transparent on costs.
Respondents rarely talked about of specific types of costs. Instead, they spoke of “cost transparency” in general terms, meaning that they want better clarity across the spectrum. However, one respondent did pick a more specific target.
“Disclose your hidden transaction charges!”
When amalgamated, transaction costs – such as broker commission as bid-offer spread – can take a huge bite out of a scheme’s returns. The Transparency Task Force recently published a list of 286 such charges which investors could run into. To pension schemes, that presents a lot of ways in which their investment returns could be eroded.
Managers are expected to perform well, as our results also show. But, without something as basic as an accurate figure for costs, it’s impossible for schemes to measure the value which their manager is adding.
So why do asset managers appear to be hindering schemes rather than helping them?
The easy answer is that there’s a culture of opacity in the UK asset management market. As one respondent remarked, the “chances of [transparency] happening are virtually nil as ivory towers are still dominant.”
The deeper truth is that active management is on the ropes.
For active management to be a viable investment strategy, it has to outperform the market. But, with the exception of a handful of top managers, this outperformance hasn’t been happening.
In order to improve the appearance of their results and create the illusion of increased value, some managers appear to have been deliberately obscure on the true extent of the costs being dealt to schemes. But the results of our research show a growing awareness of these tactics. Several respondents felt that their asset manager needed to be more “honest” and another stated that investors are “increasingly cynical about the value that active managers contribute”.
Transparency and opacity both come with risks for managers. Respondents want to see their investments performing well, and full cost disclosure may well expose flaws in their manager’s stewardship of the fund. But pension schemes are aware to the misrepresentation of costs too, so if your purported gains can’t hold up under scrutiny, then your clients may elect to go with a manager whose figures can.
Either way, the message from respondents is clear.
“Get cracking on cost transparency.”
The clock is ticking.
Click on the link below to see the full results (page 18) http://msgfocus.com/files/amf_incisive_media/project_1870/PB110117.pdf