By Nir Kaissar
(Bloomberg Gadfly) --As investors lose faith in active managers, Fidelity Investments CEO Abby Johnson is trying to stem their flight to index funds. I doubt her plan will work.
Johnson, head of the money manager that built its name and fortune on traditional active management, wrote in the Financial Times last week that the growth in index funds “in part reflects investors’ desire for value and clarity around what they are paying for, and active managers have to respond.”
Here's the problem -- active managers fail to beat their benchmarks primarily because their fees are too high. If managers want to deliver more value to investors, the easiest way is to lower their fees.
Even so, fulcrum fees leave lots of opportunities for misalignment. They create incentives for managers to take more risk when they’re losing to the benchmark and less risk when they’re winning, regardless of whether those changes are best for investors. They magnify the uncertainty around managers’ compensation, which may interfere with their ability to make unemotional decisions. They also create an incentive for managers to pick easy-to-beat benchmarks in order to rack up fees.
Given those complications, a low, flat fee is more likely to provide the clarity and transparency that Johnson is after. That’s undoubtedly one reason why investors are flocking to Fidelity’s rival, Vanguard Group. Vanguard’s actively managed funds have an average expense ratio of 0.22 percent, while Fidelity’s funds charge an average of 1.01 percent.
Investors have woken up to the fact that low fees are the surest form of alpha. Fancy fee arrangements aren’t likely to dissuade them.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.