Fidelity International's announcement on October 3 that it was implementing a fee scheme that aims to adapt fees to performance is a very good response to asset owners' and consultants' excessive focus on price reductions alone.
EDHEC welcomes the fact that by linking fees to performance, Fidelity, like Allianz Global Investors and Alliance Bernstein before them, allow investors to question other aspects of the investment management offering than the price aspect alone, especially the robustness of performance, and in the same way the quality of the investment management offerings.
Exclusively focusing on price favours a genuine phenomenon of adverse selection, which leads to a loss of interest in the quality of products, and therefore incites operators to neglect quality and reduce their research and risk control fees in order to win the price war. This phenomenon of adverse selection, which has given rise to extensive academic research, notably that of George Akerlof, who was awarded the Nobel Prize in 2001 for his research, is particularly present in the new forms of passive investment, especially smart beta, where the confusion between simulated track record and live track record maintained by the actors involved prevents investors from easily distinguishing between good and bad offerings.
Reacting to Fidelity International's announcement, Professor Noël Amenc, Associate Dean for Business Development with EDHEC Business School and CEO of ERI Scientific Beta, indicates that, "In the coming weeks ERI Scientific Beta will update its variable fee scheme, which allows investors to pay zero fees if the Scientific Beta multi-factor multi-strategy index chosen does not outperform the reference index over the year. We think that in all logic Fidelity should also reduce their fees to zero if they underperform the benchmark, which is not the case in their fulcrum fees proposal."
ERI Scientific Beta's variable scheme, which was launched in May 2016, is part of its response to the excessive attention that investors pay to fees, to the detriment of an assessment of the quality of performance and its out-of-sample robustness. Noël Amenc adds, "We are currently witnessing a highly worrying phenomenon of in-sample optimisation of the performance and factor intensity of smart beta indices to the detriment of their robustness, with a fairly cynical strategy of "sell and forget." Even though smart beta indices sometimes have live track records of more than 10 years, index promoters prefer to calculate future expected returns rather than showing their historical performance. By linking fees to performance, investors have the possibility of putting pressure on the quality of the products that are offered to them."
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