What is a suitable time period for assessing a strategy’s success?

Alex Koriath: I think you probably need more than three to five years.

Stephen Miles: It depends what the strategy is, but the appropriate time period is longer than, on average, people give it. People are used to active managers, where the manager is often trying to outperform over three to five years; however, for some factors, the cycles are really very long.

Some of the providers give statistics on the longest drawdown period, which are useful to paint the picture of how patient you might have to be. Sometimes poor returns for a factor can last for more than a decade. Size, for example, can have long swings over time and is embedded in a number of smart beta strategies. 

Ronan Kearney: That is more of a problem when you buy funds because the fixed costs of the funds makes it more likely the fund will get wound up or shut down.

I think you need to be broader in terms of what success looks like and sometimes it is not about performance

Simeon Willis, KPMG

Simeon Willis: It is a really difficult question. Even if it was five years, on the fifth birthday of the fund, is that the magic day when you can assess whether it has been a success or not? I think you need to be broader in terms of what success looks like and sometimes it is not about performance. 

It sounds a bit strange but what I mean is, you may have an investment philosophy which is, ‘I just do not like investing in companies that have not generated a profit yet because I do not think, on average, those are going to deliver returns’.

If so, investing in a strategy that avoids those sort of growth investments is something that you feel comfortable with.

You might accept that you may miss out on a tech boom, if we have that again, but it will also give you more certainty that you retain more value if we have a bubble burst. 

So the successful outcome is not, does your strategy outperform the market or outperform other people’s strategies? It is just, is it doing what I want it to do, more generally? And the performance should come through depending on the scenario.

[It] needs to be carved in stone on the day when it is decided because memories are not that long, especially when the lead decision-maker is changed

Stephen Miles, Towers Watson

Miles: I agree but, if so, that needs to be carved in stone on the day when it is decided because memories are not that long, especially when the lead decision-maker is changed. 

I think that is a really good idea, but it is not easy to pull off.

Maxine Kelly: Has smart beta become cheaper over the past 12 months?

Koriath: I think it has come down. I am not sure whether we can say definitely in the past 12 months, but over the past couple of years smart beta has definitely come down.

Kearney: This is coming from the other side of that: I think fund pricing is coming down. I am not convinced that implementation of the strategies is any less expensive to do.

So strategies that are ultimately expressed in a net format and a net index are net of the implementation fees and the other fees that are taken, and I have not really seen those coming down. Whereas the fund pricing of the unit you are buying, that is definitely getting some pressure.

Miles: Management fees are subject to competitive market forces; there is more competition now, so we have seen lower fees.

Richard Hannam: You could buy it separately managed. I mean, if an exchange traded fund is publishing its holdings every day; if I thought that a particular ETF was great but they were going to charge me 50 basis points for the fund wrapper, the listing and all the support, in theory I could go onto the website every morning, look at the holdings and replicate it.

If I can do that for 5bp, I have saved 90 per cent of the fee.

Willis: I see the whole purpose of ETFs as being the wrapper; it is the cost-effective wrapper that is providing you access to something you would not otherwise be able to access.

Hannam: I think they do serve a purpose for those that cannot get it in another form. I would argue that those starting to use ETFs include wealth managers, who have lots of private clients, where they could not do that, so they need that structure and that is the right way for them to implement.

However, you have seen it in that space, the competition is driving down the cost – so that, overall, is good for investors.

Kearney: Yes, I agree.

Hannam: However, if you look at the licence fees index providers charge, that would be one fee. I think RAFI originally started off at 12bp back in about 2005/2006 and then it became 6bp, which is broadly, I think, where it is now.

Whereas MSCI, for most of its equivalent strategies, would charge you 3bp. So you have seen that price come down and you may well see it fall further. MSCI and any index provider that has intellectual capital tied up in it will want to try and hold that particular line.

Kearney: It depends, I think. If you are working with MSCI, S&P or FTSE, it is whether you are dealing with what they would consider to be their main market reference indices, where they are trying to achieve 2-3bp if they can on licensing, or you are working with their bespoke arm, where the prices are 7.5 and north.

Those are embedded fees, not necessarily licence fees, so depending on what you are buying, that fee may already be gone.