The rising focus on investment fees and passive funds has been a challenge for active fund managers —but not an insurmountable one. Alex Sasso, CEO and portfolio manager with Norrep Capital Management, shares his thoughts on what active investment managers should do, and what investors should bear in mind when considering ETFs for their portfolio.
Can you talk about how investors’ tightening focus on fees has affected your business?
As the industry moves toward increased fee disclosure, both investors and advisors are rightly focusing on the value that’s being received. For the investment management industry, this has created a focus on the cost of mutual funds, lower cost alternatives, and the amount of active share in a fund.
For smaller accounts, mutual funds are generally well priced and offer value with an actively managed portfolio. As the investment increases, however, so does the management fee with the traditional “fixed percentage of assets” pricing model. For certain mandates, this continues to provide value to the investor, while in others it may cause them to search for a lower cost alternative.
To address this problem, we recently introduced our Z Series of funds, which offer the Canadian mutual fund industry’s first flat management fee of $1,000 + taxes on investments between $100,000 and $1 million. Under the new model, investors stand to gain significant savings as their investment grows.
What factors do you think are necessary to succeed in the increasingly challenging active management space?
As with many other industries, independent active investment managers are facing increased competition from industry consolidation, lower-cost alternatives, and technological advancements. In this environment, some of the factors I feel are critical to success are:
What are your thoughts on the increased prevalence of smart-beta investment products, as opposed to pure passive or active funds?
- Differentiation: It’s essential to offer clients innovative products and solutions
- Performance: A mutual fund company requires a performance-based culture to drive both the management side of the business and the management of its portfolios.
- A proven and repeatable methodology: It takes an experienced manager to understand what works and why it works. Advisors need a fund provider that can follow through on an established and reliable investment process.
- Competitive fees: Aside from considering the market context, fees should reflect the value clients receive.
- Collaboration: With the increasing focus on investment performance, it’s more important than ever for advisors to be able to connect with portfolio managers. Strong investment management firms should realize that total wealth management requires partnership.
- Distribution: A mutual fund company can have a great product or service, but it has to be available to customers. By working closely with our dealer partners, we ensure they know and understand our business.
In an environment where there are now more market indices than there are stocks in the US, we have seen a rise in investments that track them. While a traditional passive ETF is a market-cap-weighted portfolio of stocks tracking an index, smart-beta products screen for various factors from within the index, such as companies that are underpriced relative to their fundamentals (value stocks), or stocks with low volatility. Smart-beta products do have a higher cost than passive ETFs, in many cases approaching that of true active management.
If clients are after the lowest-cost portfolio, ETFs provide a solution for this approach — but they should be careful and understand the true cost of an ETF, factoring in commissions, the ETF’s trading costs, and the bid/ask spread in addition to the stated management fee.
As active managers, we believe a skilled portfolio manager can add value over a passive approach. While smart-beta products offer an alternative to pure passive ETFs, they need to be managed since they’re taking a position on the direction of the market. Clients should understand the increased fees, realize they’re not a set-and-forget investing approach, and that true active management may offer a greater value proposition.
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