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Size Really Matters

Summary

Barely a month goes by without a Monday morning polemic from the self-proclaimed ‘Authority of Global Fund Management’ FTfm supplement banging on about high fees and in this case, how ‘Local pensions waste millions on high fees’. Towards the end of the second column, there is some mention of performance but that comes long after a quote from the professor of pension economics at London’s Cass Business School – who knew?! Anyway he described the fees paid as ‘shocking.’ Of course, fees can be justified if the performance generated compensates for the cost of the investment expertise, but the bulk of the article prefers to focus on the absolute cost of fees mentioning as an aside, the size of the pension fund.

Barely a month goes by without a Monday morning polemic from the self-proclaimed ‘Authority of Global Fund Management’ FTfm supplement banging on about high fees and in this case, how ‘Local pensions waste millions on high fees’. Towards the end of the second column, there is some mention of performance but that comes long after a quote from the professor of pension economics at London’s Cass Business School – who knew?!  Anyway he described the fees paid as ‘shocking.’  Of course, fees can be justified if the performance generated compensates for the cost of the investment expertise, but the bulk of the article prefers to focus on the absolute cost of fees mentioning as an aside, the size of the pension fund.
Consider then that if the best performing local pension fund sat close to the top of the range of fees paid by local authority pension schemes (but was constructed in an appropriate risk-controlled fashion) I’m sure that this article would still be lambasting the level of fees paid. The point is that in this example there would still be value for money.
Little wonder at my surprise then when I turned the page to find at the bottom of the next page, an article with the headline, ‘The money keeps rolling into hedge funds.’ Traditionally, hedge funds are among the highest charging asset managers.
Of course you get what you pay for and if your manager isn’t delivering what you expected over an extended period, he or she should be removed. The inference is that many pension funds lack the expertise to make the appropriate investment decisions so many employ consultants at extra cost. Having said that, I know of one local authority pension fund in the north of England that does not employ a consultant but uses a combination of in-house expertise and external managers (both active and passive) and has done well. One of the keys to their success is the size of their active management slice and not being too big to succeed in areas where relative and absolute value can be extracted.
The FTfm article mentions that ‘the average local authority pension fund size is £2.3bn’ suggesting that this dimension should be used to negotiate lower fees. At that size it shouldn’t be impossible to find active managers to generate decent returns but much depends on the skills to allocate assets optimally and seek out the best fund managers as determined by a combination of fees, performance and risk. In many cases those skills aren’t available internally requiring external help possibly in the form of a consultant (more fees but not covered in the article). Often local authority pension schemes fall victim to herd mentality default positions.
At T. Bailey we’re confident that we have the skills to allocate assets appropriately, find managers driven by returns not asset gathering, unconstrained and agnostic to indices and where their fees as with our own, represent a fair price for achieving investor outcomes. Maybe some pension funds are too big and like the two international heavyweights quoted in the self-proclaimed ‘Authority of Global Fund Management’ who have exited hedge funds, it was because their impact on the overall pension scheme was minimal due to the size of the pension scheme not necessarily the performance of the funds.
As we’ve said here before (more than once), size really matters. It enables you to invest without being too big to succeed.
A good example emerged this morning with the news that TwentyFour AM are to shortly soft close their Dynamic Bond Fund as they do not wish to compromise the investment performance of the fund which has smashed the performance of the relevant Investment Association sector since its inception in April 2010; 53.01% versus 34.17%. The fund charges an institutional fee of 0.75% per annum.  You could buy another fund where the manager and their firm are compensated by assets rather performance and the fees may be lower. Maybe you wouldn’t.

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