Active managers should only charge fees in line with the returns generated from the investment manager's skills, according to Sharon Fay, chief responsibility officer at AllianceBernstein.
Speaking at the JANA Annual Conference, Fay said not all active strategies deserve active fees.
"It's important to isolate the true value of an active strategy and pay fees commensurate on that value," Fay said.
"You need to calculate how much of the returns is from beta, how much is from exposure to factors like growth or value, and what's remaining from those returns that can be associated to manager skill and active management."
|Sponsored by Jamieson Coote Bonds|
8 reasons to hold high grade bonds today
Prime alpha, Fay said, is very persistent and if a manager has been able to achieve higher returns over time the likelihood of them being able to continuously deliver the same is very high.
"If you're going to employ active strategy, you need to ensure the fees you're paying are commensurate to the value you're receiving," Fay said.
In addition, Fay said investors need to focus on long-term investing goals which have only been re-affirmed due to the COVID-19 pandemic.
"The focus needs to be on long-term investing goals. For pension plans that mean generating cash flows in excess of the inflation rate and not investing against short term downturns in the market," Fay said.
Fay said, for a portfolio of 70% equities and 30% fixed income, it would take approximately five years to recoup the COVID-19 market losses.
Whereas, if at the height of the volatility the investor switched the portfolio to 70% fixed income and 30% equities, it would take eight years to get back those losses.
"It's important to know what you can and can't forecast and understand that the bear case for highest-risk assets is not always the case with bull assets," she said.
"There is a place for meaningful allocation to passive strategies but I wouldn't be putting all my eggs in that basket."