EUROPE - Pension funds and asset owners who want to generate alpha from absolute return investments need to toughen up their "procurement skills" and push asset managers to cut costs, according to consultancy Watson Wyatt.
Speaking at the Institutional Fund Management conference in Geneva, Roger Urwin, global head of investment consulting at Watson Wyatt, said pension fund officers need to "turn up the dial on alpha" and push for reduced fee arrangements when investing in alternatives.
"The alternative asset absolute return is extraordinarily expensive, so it is not clear the value proposition is there in many cases," said Urwin.
"Asset owners' do have to work harder at their procurement skills, at getting more of a ‘bang for your buck' in fee arrangements. Institutions as price trackers is quite an unsophisticated position. I don't think it is going to be comfortable for institutions to become price markers and make changes. But we have been putting much more time and energy into putting pressure on the industry [to reduce fees]," he added.
His comments were challenged, however, in a later presentation by William matt, ceo of investment boutique Martin Currie, who argued pension funds cannot expect to see lower fee arrangements under the current market makeup.
"If you want to deal with the cost of alpha you have to think about the supply issue and if you want fees to come down, it will not be while supply is limited. The pension fund and consultant has got to recognise these supply and demand issues. If you want to broaden out and reduce costs, you need more entrants to the market," said Matt,
His comments were opposed by fellow panellist George Moeller, chief executive of Robeco, who argued "there are ways to generate alpha without charging exorbitant fees".
"The spread of performance is so wide in [the hedge fund] space there will be a downturn process. Those charging high fees and not generating alpha are going to be caught out," he suggested.
At the same time, Moeller instead predicted with the pressure on asset managers to perform and recent turbulence in the investment markets, pension funds may increase their demands on managers to deliver returns matched to new benchmarks.
"Alpha and beta is a fee discussion. But why pay a lot of money if you can buy beta and then have more money to buy on the alpha side," said Moeller.
"I don't believe in the future we will be so benchmark-orientated. We believe inflation is coming back. So if interest rates are 3% and the benchmark is 4%, the demand will be to match inflation. Institutional investors will demand we beat inflation in all circumstances," he added.
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