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  • Cornerstone Team

A great British shake up

The 'merger of equals' between UK based asset manager Henderson and US based Janus Capital is all about scale and reach. In greater part this has been brought about through the need to drive costs down in a low growth and return world as exemplified through the rise of so-called passive funds. 

It is, after all, the net return after fees that matter. Fund managers are going to struggle to perform sudden miracles and deliver outsized returns in the prevailing low return environment. So, it is fees that make a significant difference to the bottom line.

When investing, it is worth asking first whether you are looking to generate beta (the market return) or alpha (the deviation from that market return – positive …or negative)?  Many will probably say they aim for both but, more often than not, better results are usually achieved when investors separate the two sources of return and let the overall objective (alpha or beta) drive the portfolio construction process. 

If you primarily aim for beta, in a low return environment, fees charged by the vast majority of active investment managers are way too high, and you should not hesitate to switch to a passive investment strategy, which will cost you a fraction and, on average, deliver better returns (as the average alpha after fees is negative). 

There are plenty of so-called active equity managers who will say that they are certainly capable of generating both beta and some alpha on top, but if they are that good, why, (at the risk if encouraging past performance to be a guide to future performance) haven’t many done so consistently?  Of course there are exceptions but, in reality, there are fewer active equity managers who consistently generate a meaningful amount of positive alpha after fees than those that don't. 

Whilst there is always a place for active asset managers, it is lower fees that will determine those that have a part to play. Expect more mergers and acquisitions amongst the active managers. That is not to say that specialist asset managers, with proven ability to generate alpha, cannot maintain a position. 

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