New Study Links Higher Fees to Passive Strategies
A new study, published by Watson Wyatt, suggests that some pension funds are weary of expending higher investment costs. In "A fairer deal on fees," authors find that "pension funds around the world are paying on average 50% more in fees than they were five years ago" with costs now averaging north of 100 basis points. The study goes on to suggest that external asset managers and brokers get the lion's share, in exchange for promises of alpha but delivery of beta. As market conditions sour, pension decision-makers are going to feel even more pressure to justify the fees they pay to outsiders.
No surprise then that some pension funds are looking to indexing as a salvo. In "Pensions turn to passive management," Financial Times reporter Owen Walker (May 4, 2008) writes that assets being allocated to index-tracking funds are on the rise. John Davies of Standard & Poor's adds that financial service providers are fast developing products to appeal to thrifty fiduciaries.
Lest a pension fiduciary think that indexing (in whatever form) lets them off the hook, it's not that simple. If less money is apportioned to active managers, the ones who are selected (or kept) must do "extremely well" to offset any lower returns from the passive component of the overall portfolio. Assessing risk management policies of external managers remains a critical task.
