Alpha vs beta: the illusion of choice

If we do have the choice to pursue alpha or beta, apparently we're not exercising it according to Brendan Maton, in Monday's FTfm.

Despite all the hours spent debating the relative merits of alpha (outperformance due to the skill of the active manager) or beta (the low-cost passive investment approach of exchange traded funds that follows market performance) investors are not separating the two approaches.

Maton talks to Steve Birch, head of manager research at pension fund adviser, Hymans Robertson

“I would be more than happy to pay well for performance upside with a manager that could demonstrate skill,” says Mr Birch.

“I would comfortably recommend such an approach to our clients. But there is a noticeable lack of products offering alpha only. The investment industry likes the comfort that beta gives. It’s a cushion of revenues. There are not enough firms willing to be rewarded for skill alone.”

Maton wonders whether the glut of so-called active asset managers in the industry might be part of the problem and talks to one of the authors of a forthcoming report from the Paul Woolley Centre for the Study of Capital Market Dysfunctionality. The report blames asset managers, their clients and intermediary consultants’ excessive belief in the superiority of their own decision-making for the glut of asset management organisations.

Will true alpha come with consolidation?