What drives fund distribution: Alpha, or Beta? Or maybe 'Omega'?

We all know that the greek letter alpha (like beta), originally introduced to formally describe expected returns, has been supercharged as a synonym for fundamental concepts of investing: 'alpha' is broadly used to describe that share of investment results – performance, active return, quality of fund management, etc. – that surpasses those returns that would have been achieved by simply buying the market exposure, i.e. the 'beta'. The positive notion of alpha as a measure of investment excellence thereby corresponds to the implicit attributes of beta being simple and cost-efficient, something that can be achieved without much effort in portfolio management.

The question is: is alpha in the above sense of the term the most important argument for selling funds, or mandates? And, in regard to product development in our industry, is it really all about finding new sources of alpha, and generating it by more sophisticated fund management?

Securing returns - and achieving alpha - is certainly the main focus of the fund industry - next to raising assets-under-management, for which alpha is seen as its most important lever. Nothing new under the sun? Would it not be even more pronounced, since we are suffering a persistent low-interest rate environment? The question is: are our clients, the institutional investors and asset owners, as obsessed with alpha, as we are?

Two corollaries of this are: is product development in the asset management industry heading into the right direction? And what could be the unique selling proposition of one fund, compared with another, besides alpha, or potentially risk-adjusted alpha?

In distribution, we realize more often than not, that mandate business and fund sales depend more on implementation, fitting into regulatory constraints, and providing 'solutions' within an increasingly complex framework. That determines the thoughts and worries of the asset owners. Let us call this implementation dimension the 'omega' of investment.

The question to be discussed is whether fund sales works as selling alpha (maybe at a bargain, which is one of the reasons for the ascent of the Smart Beta concept and the growth of Smart Beta investments), or whether our industry can be a 'solution provider' - a much over-used term?

Do the two sides of the industry find together, or is there danger of a disconnect in the supply-and-demand chain?

What do you think?

Dr Oliver Roll will be chairing a panel discussion Special Focus: German institutional investors and third-party funds on Monday 6th June at FundForum International taking place in Berlin.