Against the background of ongoing price wars between management companies and constant pressure on commissions, the question increasingly arises: «What do we pay an active manager for?»
Often this issue is provoked by the Criminal Code itself, which deals with the so-called “closet indexing” — that is, they take a commission as for active management, and in fact, they form a portfolio that is as close as possible to the index. In such a situation, it is really not clear why to pay them 1% per annum, when you can simply buy an index fund for 0.1% per annum.
Today in the Financial Times published an article that offers an interesting way to solve this problem. It proposes to use to calculate the «honest» commission of the so-called. «active share» of the portfolio. Usually, MCs publish the «active share» indicator, but investors somehow ignore this value, concentrating only on the amount of commissions.
How should this work? For example, some active fund declares that its management fee is 1% per year, and the “active share” of a portfolio is 50%. This means that the «passive» portfolio share also accounts for 50% of the portfolio and is managed as an index. That is, for this half of the portfolio a fair commission, for example, 0.1% per year. But then it turns out that the real commission for that part of the portfolio, which, in fact, is actively managed, is as much as 1.9% per annum. And this can already radically change the perception of investors and the competitive landscape.
In my opinion, a useful proposal that will help to look behind the scenes of the process and see who is worth.