If there is one theme that unites all sides of the investment universe it is that costs matter to clients, and everyone in the value chain is seeking to preserve their slice of the pie.
It is into such market conditions that providers of alternative assets are battling for market share, but due to the idiosyncratic nature of many of the assets held in such products, fees can look high when presented on a client’s statement, particularly in the context of passive funds having very low headline charges.
But is the pricing of alternative assets moving in the same direction as that of conventional equity and bond products, and can this lead to an uptick in demand for those assets?
Of course, the range of assets that come under the umbrella of 'alternative' is vast, and ranges from property investment trusts to hedge funds.
Mark Lane, head of active funds at Progeny, says the pricing outlook for alternative assets varies depending on the type of alternative, with the caveat being that the alternatives with the greatest capacity to offer diversification, may be the more expensive.
He says: “It really depends on the type of alternative assets that one is choosing. Alternative risk premia are increasingly mainstream and available in exchange-traded fund wrappers or daily dealt funds. However, in practice most of these are a form of equity risk premia and are less diversifying than one might initially expect.
"We believe value for money is key for investors and where we find alternative assets that complement our broader portfolio and add genuine diversification without introducing too much opportunity cost, then we feel that price needs to be considered in a broader context. These criteria set a high bar for inclusion in portfolios."
Matthew Yeates, deputy chief investment officer at 7IM, narrows these price differentials down further, remarking that property and inflation-linked bonds tend to be properly priced and offer diversification, while he avoids infrastructure assets on pricing grounds.
Simon Molica, senior investment manager at Parmenion, says many traditionally institutional investors have begun to launch adviser and retail-friendly versions of their strategies – that is by creating a Ucits fund that mirrors the institutional strategies.
The Ucits version would typically be priced in line with the sort of fees advised clients are used to paying. He specifically cited the example of hedge fund strategies moving into this space and says these are helping to redefine the structure of fees for the wider alternatives universe.
Yeates says that many active alternatives products simply offer a slightly different exposure to bonds or equities, but with active management fees. His view is that in many cases it might be better to simply buy a passive instrument, even if those come with slightly less in the way of diversification benefit.
Simon King, chief investment officer at Vermeer Partners, says the advent of ETFs in the alternatives universe should lead to lower fees, but his predominant concern is that the composition of the assets in these ETFs may not align with the type of exposure that a client is seeking.
Claude Kurzo, UK country head and head of financial intermediaries for MEA at JPMorgan Asset Management, says performance factors have also contributed to the higher fees in the alternatives universe.
Kurzo says: “The alternatives universe has traditionally maintained higher fee structures due to the specialised expertise and unique strategies employed by managers.
"Despite a general trend towards fee compression in asset management, alternatives have been somewhat insulated from significant price pressure. This is largely because the dispersion between top and bottom quartile managers remains substantial, indicating a wide performance gap.
"Investors are often willing to pay a premium for access to top-performing managers who consistently deliver superior returns. The repeatability of outperformance by certain managers instils confidence, making investors less sensitive to fee structures.
"This consistency is particularly valued in the wealth management industry, where clients prioritise reliable returns and effective risk management.”
Kurzo does feel there is scope for fees to fall in the future, as the better performing alternatives attract sufficient assets to grow and cut fees as economies of scale become relevant.
They added that one of the ways in which these economies of scale are increasingly being achieved is via partnerships.
Kurzo says: “By leveraging these partnerships, asset managers can reduce operational costs and improve efficiency, potentially allowing for more competitive pricing without sacrificing quality. These strategic partnerships can also open up new, cost-efficient investment approaches, such as co-investments.
"Co-investments allow investors to participate directly in specific deals alongside the main fund, often at reduced fees, offering a more tailored and cost-effective investment opportunity.
"This type of collaboration enables managers to offer innovative products that meet investor demand for diversification and liquidity.
"Strategic partnerships increasingly offer a pathway for more competitive offerings."
David Thorpe is contributing editor at Asset Allocator
