KZVK-VKPB: Negotiate on fees to unlock benefits of active management
Investors do not have to pay high fees for active management, which can add value if costs are contained, according to the CIO at Germany’s KZVK-VKPB pension funds for Protestant church employees.
In an interview for IPE’s ‘On The Record’ in the magazine’s January issue, Wolfram Gerdes said: “A … key criterion that has to be applied to safeguard alpha is making sure you are not overpaying for it.
“The commonly held knowledge is that good managers can afford to ask for high fees, but our experience is different.”
It should always be possible to negotiate fees with good managers, he added.
In a qualified argument in favour of active management, Gerdes also said the experience of KZVK-VKPB was that, contrary to common belief, active managers did not have to be small (in terms of assets under management) to be good, and that alpha was not only available in illiquid markets.
Good active managers tend to have two main features in common, according to Gerdes – strong ideas and beliefs, and continuity of staff.
Jaap van Dam, director of strategic policy advice at Dutch pension manager PGGM, also stressed the importance of keeping down costs if active management was to be worthwhile.
“If you look at aggregated results of pension funds globally, there is a small contribution from active management to the total return, and only if it is well controlled for cost,” he told IPE.
Sharing his views on active management for a special report in this month’s IPE magazine, van Dam said most investors “should not accept paying higher fees to managers to build more concentrated portfolios”.
He flagged the prospect of new types of active management mandate that address asset owners’ increasing focus on “long-horizon investing”.
This would deal with “the great difficulty” with active management, which is that it tends to be short-term in nature, according to van Dam.
“This ‘long-horizon investing’ is taking off as a movement, as seen in initiatives like Focusing Capital on the Long Term,” he said.
“This may lead to new forms of mandates that will be ‘active’ in the sense they will be far from any benchmark but also low in terms of turnover because the basic idea is to invest in companies you trust to be able to grow your capital on a longer horizon.
“The questions whether companies are sustainable will probably play a significant role in our case in particular.”