Changing the Conversation on Management Fees

Bloomberg report:

“BlackRock Inc. is tired of the conversation about costs. The world’s largest asset manager, which runs some of the cheapest investment products available, plans to place a greater focus on the quality of the engineering, construction and management of its funds going forward, …… “

“There’s too much emphasis purely on cost,” said Senra, ……….. “We don’t talk enough about quality. That’s not to say we’re not going to be competitive — we have to be competitive, this is a competitive industry — but I would move away from just a low-cost conversation.”

 

I agree, “too much emphasis purely on cost”, investment management fees, there should be a “greater focus on the quality of engineering, construction, and management”, and “we don’t talk enough about quality”.

 

Now don’t get me wrong, I think investment management fees are important.  I also think we should have a mature discussion about fees.  

The cheapest solution may not be the best, a race to bottom is not helpful.  And I’d say, not necessarily in the best interest of investors.

 

There are many reasons why you might consider paying more for something.  In an investing context this could be for greater levels of true portfolio diversification to manage portfolio volatility and return outcomes, for example the model followed by US Endowment Funds which has been very successful.

 

I appreciate BlackRock is making comment in relation to gaining access to certain areas of the market that they believe will deliver greater return outcomes overtime. 

 

I think this is an interesting issue when framed in the context of Responsible Investing.  Particularly in relation to quality of data, portfolio construction, and portfolio management.   From a more broader perspective, it also  helps highlight issues beyond just a headline investment management fee.

 

The evidence is compelling, Environmental, Governance and Social (ESG) investing can be a clear win for companies.  It can also be a clear winner for investors, yet it is not easy to capture this value.

For a start the ESG data is not consistent across providers.  At the company level this creates a diversity of opinion amongst providers.  Several studies have highlighted the contrasting conclusions of ESG data providers. (See this article on ESG Scoring, sourced over LinkedIn and published by RBC GAM.) 

Studies highlight the low level of correlation between ESG data.  This can result from different weighting systems that generate an ESG score and that there is a level of subjectivity in determining the materiality of ESG input.

 

Let’s consider this from a New Zealand perspective.

As the recent RIAA Benchmark Report  highlights:

“When primary and secondary RI strategies are taken into account, the dominant responsible investment strategy is negative screening, which represents 44% of AUM. Where ESG integration was nominated as the primary strategy, it was usually paired with either corporate engagement and shareholder action, or negative screening, as secondary strategies.”

Negative Screening is the dominant Sustainable Investing approach in New Zealand, to move beyond this will take an increasing level of resources and time.

There is a lot more to RI than negative screening.  The implementation of negative screening is not straight forward i.e. coming up with the investment philosophy, approach, and framework takes time and consideration, trading on the exclusion list is relatively straight forward.

 

As the RIAA Report covers, there are seven broad RI strategies as detailed by the Global Sustainable Investment Alliance (GSIA) and applied in the Global Sustainable Investment Review 2018, which maps the growth and size of the global responsible investment market.

The Broad RI strategies are:

  1. ESG integration
  2. Corporate engagement and shareholder action
  3. Negative/exclusionary screening
  4. Norms-based screening
  5. Positive/best-in-class screening
  6. Sustainability-themed investing
  7.  Impact investing and community investing

 

Best practice RI involves the full spectrum of these strategies, negative screening, ESG integration, Best-in-class and impact investing, at the very least.  This includes corporate governance and shareholder action.

 

So how do New Zealand’s leading investment managers compare to best practice.  The RIAA report makes the following comment in relation to New Zealand managers:

“There’s a growing number of investment managers applying leading practice ESG integration, but the overall number remains small. Of the 25 investment managers assessed, just eight (32%) are applying a leading approach to ESG integration (score >80%). That said, the number of leading ESG integration practitioners has risen from four last year, with some employing other responsible investment strategies as their primary strategy.”

 

It is great to see ongoing progress.

To implement leading ESG integration practices, let alone capture the full value of the ESG factors, takes time and resources.  Those managers making this commitment are to be commended.  It takes a lot of hard work.

The market leading managers are applying a wide range of sustainable investing approaches and resources.  This comes at a cost.

 

Therefore, some thought must be given to quality of RI outcomes being delivered and are they in line with best practice and is there continuous improvement in place.  Do they meet customers expectations?

 

Accordingly, I agree, let’s change the conversation about investment management fees, there are a lot of issues to consider other than investment management fees alone.

There is a lot to consider in delivering robust outcomes to investors.

Happy investing.

 Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

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