FEES
Interest in using factor investing in DC as a cost cutting measure has neatly coincided with steadily falling fees. Both Blackrock and State Street confirm their fees for alternative index provision have fallen. The ballpark price for one of these alternative passive strategies can be as low as 10-15bps.
Dave Gibbons, head of investment strategy EMEA at Blackrock, cites advances in computing for keeping costs low for smart beta. “Technology has been a liberator for this part of the market,allowing smart beta to carve out a role between traditional beta and traditional active.” He adds that competition has been another factor in prices falling.
The potential for factor investing to offer schemes a measure of diversification at a low price, is seeing the approach spoken of in the same breath as high fee diversified growth funds (DGFs), which have typically sat alongside passive equities in defaults.
Dorian Whitehead, investment consultant at JLT, cites regulations requiring trustees to demonstrate how they have gained value for money as providing a trigger for some schemes to ditch DGFs for alternative indexation. “Trustees want to see value for money, so anything that feels like an additional benefit for members will be a big tick in the box. They will want to feel that their members are getting good returns, low volatility, but at a reasonable price.”
Yet for all this talk Sarah Smart, chair of trustees at the Pensions Trust (TPT), sees fees for alternative indexation as not low enough yet.
She cites the licence fee for a market cap index as 2bps compared to 6bps for a fundamental index – a fee that stays the same however much an investor puts into it. “If index supply was on a pounds and pence basis rather than an ad valoreum fee, we would have a lot more of this and would arguably produce a lot better returns for DC investors, it would certainly give trustees a lot more to think about whether they should be using it.”
One potential outcome is that as more investors use alternative indices then the fees will fall, but then potentially so too will the returns.
TIMING
There are two prevailing views on the timing of factors.
One is that different factors are either overvalued or under-valued at any point in time, so a dynamic allocation approach is needed to buy them. This approach sounds good in theory, but is dependent on processes and skill that will push up fees but with no guarantee of success.
Redington director of research, Nick Samuels favours this active lite approach for the growth stage. He describes it as trying to “ape what a fundamental active strategy is trying to achieve”.
