Annabel Tonry, executive director at J.P. Morgan Asset Management (JPMAM), explains why the additional alpha you get from an actively managed strategy can make a difference
Following the introduction of the ‘charge cap' we've seen a lot of DC schemes become very focused on cost and imagining the lowest cost to mean: ‘I've got the best possible deal'. This doesn't apply to all DC schemes but we have definitely seen a shift, with plans starting with price rather than objective. It's important to make sure that trustees are still enabled to make the right investment decisions and don't feel concerned about, for example, increasing fees within the charge cap if they believe it's in the interest of members to do so.
Passive allocations can help reduce costs for DC plans but a fully passive approach could be quite volatile, depending on the market conditions and it could potentially limit your diversification, depending on the type of asset class that's being considered. Furthermore, particular sectors may carry more risk and active management can add significant value.
We also have to consider that a passive approach will always underperform the benchmark net of fees. In an environment where returns are likely to remain low, the additional alpha that you get from an actively managed strategy can make a meaningful difference, especially when compounded over the lifetime of a DC saver.
Click here to learn about why DC schemes should take a flexible approach in a low-return environment.