Does paying more deliver more performance?

Looking at the cost data I have collected on behalf of pension schemes so far, there are six sub-asset classes that showed a positive correlation between total cost and net performance.

Four of these six are fairly obvious. As illiquid assets classes, infrastructure, private equity and private debt, tend to have performance (ie, carry) built into their valuations, which are internal rate of return calculations and therefore a form of estimate.

Hedge funds are also generally performance fee-geared. The other two are fixed income (other) and active UK equity.

Table 1: Does fund performance improve if you pay more?

For both of these, the differences in net performance between the lowest and highest quartiles of cost were marginal, and at the border of their respective quartile boundaries. So the data cannot be said to support the hypothesis that spending more will generate better performance within an asset class.

Reflecting on this, it occurs to me that the ‘assessment of value’ reports that asset managers now need to prepare might be extremely useful for asset owners if they can demonstrate where a manager sits on the cost/performance landscape.

Assessment of value is a euphemism for value for money, and you cannot assess this unless you know at least the performance – which is one measure of value – in the context of cost, which is the only measure of money.

In the absence of any direct instruction on best practice for writing assessment of value reports, demonstrating value by showing comparative quartile cost and performance for a fund is perhaps a good starting point.

Dr Chris Sier is chair of ClearGlass Analytics and led the FCA’s Institutional Disclosure Working Group