The study, published by Sydney-based ETF provider VanEck, which offers a competitor product to active managers, found that active managers are charging high fees while producing negligible alpha.
Worse: much of the exposure they’re giving can be easily replicated by smart beta ETFs, which can offer active management-style strategies at a fraction of the cost.
“If you’re hiring an active manager you want to make sure that for the fee you’re paying you’re getting alpha,” Russel Chesler, CIO of VanEck Australia, told ETF Stream.
“What you don’t want is to pay a high fee to a manager for something you can get a lot cheaper from a smart beta fund.”
The study, titled When are fees too high? put the fees Aussie managers charge under the microscope. Assuming that investors are willing to pay more fees if managers generate more alpha, the study plotted the amount of alpha managers produce against the fees they charge.
Alpha was calculated using Morningstar’s classification system, which pigeonholes managers as providing value, growth or blend strategies. Based on Morningstar pigeonholing, managers were then benchmarked against MSCI value, growth or multifactor indexes to see how they performed.
As an added measure, VanEck put in its own view (represented in the blue line above) of what fees should be for a given level of alpha.
It found that 51 out of 79 managers charged fees far beyond what their performance justified, leaving them vulnerable to the advance of smart beta products.
“At the end of the day, if active managers don’t actually do something – either change their strategies to produce more alpha or reduce their fees – they face some hard decisions. They must evolve to survive," Chesler said.
“If you’re hugging a benchmark and you’re not producing that excess return eventually people aren’t going to pay for it.”
He added that the market is already hearing the opening notes of the active management swan song with the large super funds, which are starting to run their own smart beta strategies in-house. As super funds develop more smart beta capacities, they will only go to managers that can demonstrate that they’re producing alpha, he believes.
The study also found that Australian managers performed worse and charged more than their peers globally. In other markets, especially Europe and the US, manager underperformance was less pronounced.
"The Australian market is very concentrated with 20 shares taking up 60% of the market," Chesler said. “So in Australia, it makes sense that you can explain a lot more of the alpha using smart beta factors.”