Amin Rajan: Active investing needs meritocratic fee structures

Active asset management fee structures need to become more meritocratic, according to Amin Rajan, CEO of CREATE-research.

Presenting independent research commissioned by eight* asset managers for an active investing conference held in London yesterday, Rajan said active managers need to be guided by two main principles. 

One is a recognition that, as investors and regulators have become vigilant about charges, investing has become about value for money rather than just returns.

A second principle is that fee structures need to become much more meritocratic.

Investors want their asset managers to “eat their own pudding as well”, said Rajan.

Addressing the debate about active versus passive investing, Rajan said it involved “more heat than light” and that it was misplaced to consider the two styles mutually exclusive.

Instead, they are mutually complementary.

“To me they’re like yin and yang,” he said. “They each support one another, they each thrive on one another.”

He said this interdependency had, in his opinion, not featured in debates on active investing that he had attended.

The outperformance trends of active and passive investing were cyclical, with both having swapped places as winners over different market cycles historically, Rajan noted.

When markets are inefficient, active managers step in to buy or sell over- and under-valued stocks, respectively, he said.

As markets become more efficient again, more money will flow towards passive funds, which will lead to renewed price distortions and offer opportunities for active managers.

Rajan said that despite a hostile environment, brought about by developments such as quantitative easing and regulatory pronouncements favouring passive funds, many active managers have performed well.

“This fact has not really been that widely recognised,” he said.

Still, active managers need to “up their game” and are doing so, he added.

All the managers Rajan has spoken to over the past two years – some 100 – recognise that they needed to change given that the shift to passive is structural, he said.

European institutional passive investment grew by nearly three times as much as active investment between 2013 and 2017, according to IPE’s Top 400 Asset Managers survey.

*Aberdeen Standard Investments, BMO Global Asset Management, Columbia Threadneedle Investments, Franklin Templeton Investments, Janus Henderson Investors, Jupiter Asset Management, M&G Investments, and Schroders