Cheap and Cheerful – Or a Bit of Luxury?

by | Mar 6, 2014

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Thomas Wells AvivaA combination of the two will suit many investors, says Thomas Wells, Senior Multi-Manager Analyst  at Aviva Investors

With my two-week holiday fast approaching, I am deliberating on where to go. Now, the advantage of being a single 29-year-old, aside from not having my Saturday morning lie-ins disturbed by a restless toddler (much to the jealousy of my ‘child-blessed’ colleagues), is that for holidaying the world is my oyster. So do I hit the party beaches of Tel Aviv, the tranquil mountains of Nepal or the scenic plains of Africa? Well, as with all aspects of life, it depends on cost. While I might aspire to spend two weeks in such far flung destinations, if my budget won’t stretch then it may have to be two weeks at home.

Now this makes me think of the asset management industry and its collective move to a lower fee culture. It’s important to focus on fees and ensure that investors get value for money – after all, fees are a known outcome unlike returns. However, there is a risk of becoming too fee conscious and forgetting it is net-of-fee returns that really matter to the underlying investor.

For some asset classes, such as large-cap US equities, generating consistent alpha is a near-impossible task due to market efficiency. Hence, I would encourage pursuing a low-cost passive option. However, it would be a mistake to apply such an approach to all aspects of investing; some active managers in less-efficient markets do earn higher returns to justify the fees they charge. For example, Crispin Odey’s European Inc is a fund that has outperformed its benchmark, the MSCI Daily TR Net Europe, by 1,287% net of fees since its inception in June 1992. I would advocate that such a scale of outperformance warrants the fees charged. However, for those investors focused solely on low-fee solutions they risk missing out on such manager outperformance.

My holiday may end up being a compromise of a few days of ‘cheap and cheerful’ at home with a bit of luxury abroad. Similarly, investors should consider a pragmatic approach and combine lower cost core funds from some areas with more expensive alpha-generating managers in others.

 

 

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