A new white paper by investment firm VanEck said that active managers are charging high fees and unless they evolve, they will be forced out of existence by disruptive smart beta investment strategies.
The paper, When Fees are Too High? found that most Australian equity funds should be charging fees between 0.35 per cent per annum and 0.65 per cent, yet many charge double that.
The paper found that if an active Australian equity fund delivers 50 per cent pure alpha, its fee should be about 111 basis points and if it delivers 100 per cent smart beta its fee should be about 35 bps.
Therefore, the study found most funds should be charging around 35 bps as most of their performance can be explained by smart beta; yet most actual fees were overpriced.
VanEck’s director of investments Russel Chesler said that smart beta was disrupting active management and many managers needed to adapt to survive.
“This is evident in Australian equities with most active managers charging too much for the outcomes they provide and our analysis shows most of those managers, or 65 per cent, will potentially be displaced by smart beta strategies,” he said.
Active managers also needed to differentiate themselves and provide what smart beta cannot, said Mr Chesler.
“Active managers must also differentiate themselves and provide what smart beta cannot. If this differentiation can’t be achieved, then investors will continue to question the fees they are being charged and smart beta strategies will become mainstream,” he said.
It was a case of succeeding past the benchmark, said Mr Chesler, and only those that evolved would survive in the industry.
“Australian equity managers that continue to offer benchmark-like performance for high fees face extinction. They must evolve to survive,” said Mr Chesler.
