Alpha fees for beta performance

Think that shareholder activism is a waste of money, and that pension funds are better off sticking to doing the 'normal' stuff? Think again. We are no better at doing that, and are chucking ever more money at providers to deliver 'alpha'. See this story.

LONDON (Thomson IM) - Pension funds around the world are paying on average 50 pct more in fees than they were five years ago in their growing quest for alpha - and should 'take a hard look' at the charges they pay, according to research by Watson Wyatt.

Average fees are around 110 basis points compared with around 65 basis points in 2002, with the vast majority of these costs being paid in fees to external investment managers and brokers, the study reveals.

Paul Trickett, European head of investment consulting at Watson Wyatt, said: 'One of the main reasons for this upward cost spiral is investors' focus on 'alpha', which has increased their appetite for alternative assets.

'Investors have naturally assumed that they are paying these fees to reward manager skill, but in many cases they are wrong,' he said.

The firm said that many pension funds have been paying alpha fees for beta performance because the main driver of returns in recent years has been the strength of the markets.

This in turn has encouraged investment managers to leverage their portfolios to boost returns, which means that investors are often paying for leveraged beta.