Amid debate about the variables that go into the performance measurement of active fund managers, RealIndex head of investments David Walsh says both retail and institutional clients are becoming more and more discerning as to the different metrics involved.

Speaking on a live webinar entitled ‘Addressing fees and performance head-on‘ as part of the Professional Planner Digital Researcher Forum 2020, Walsh said he’s observed an “evolution” in peoples’ understanding of the way performance should be measured. Distinctions that were previously only in the realm of fund managers themselves are common knowledge among investors of all classes.

“It’s been interesting from my side to see the evolution of the idea of style and the split between risk factors and alphas and how that has emerged through time,” Walsh said. “We’ve seen quite a significant increase in dislocation on the client side [regarding] what amounts to a particular investment style, how they separate between risk factors and alphas, and the uniqueness and consistency of that alpha and how it’s measured.”

For money managers, this democratisation of understanding means the performance metrics used need to be accessible and understandable for a broader range of clients. “Understanding how consistent alpha is and how you can measure it is a key criteria that a lot of the clients and asset consultants will ask about,” he said.

Walsh was joined on the panel by Delta Research and Advisory principal Michael Furey, Quilla co-founder Andrew Connors and Willis Towers Watson head of strategic advisory, Jessica Melville. The session was hosted by The Conexus Institute executive director David Bell.

There was a consensus among panellists that among the factors contributing to any analysis of fees and performance, the difference a manager adds with their own knowledge and nous is the most important.

“For us it’s that idiosyncratic benefit where the manager is able to generate above the index, and we spend a bit of time trying to decompose that and trying to figure out what is true alpha and managers trying to take a bigger beta than the market,” Connors said.

Melville noted that while WTW also focusses on the “idiosyncratic, true alpha component”, the firm also incorporates ESG and past performance metrics into their assessment.

The “idisyncratic, intellectual property risk”, Furey said, is what people pay the “big money” for.

“If there’s historic evidence of that idiosyncratic value having a negative value and not adding alpha, it’s often due to the high fees,” Furey added.

See the full session below.