This year’s 9th AsianInvestor Institutional Conference was held in Hong Kong this week at the swish Ritz Carlton Hotel . It was dominated by presentations by some of the larger global asset managers. Correspondingly, Cerulli Associates and Towers Watson both bemoaned the lack of alpha in the mainstream asset management industry, repeating Warren Buffet’s oft-heard claim that net of fees, the industry adds no value. Peter Ryan-Kane of Towers Watson referred to the assets managers as the “Shiny Suits”, suggesting that the wholesale shift to passive would result in “far fewer of them in airport lounges”.

The headline that appeared to have grabbed most attention and sparked this debate was the FT article on recent recommendations by the UK Treasury that local government pensions funds should reject active managers in return for cheaper passive and replication strategies. When I heard this myself I didn’t know whether to laugh or to cry. ?After all it appears to be a wholesale act of folly by one of the UK’s largest pools of pension capital.

Renouncing the search for alpha because some PhD in Whitehall says it doesn’t represent value for money, just smacks of laziness. This is tantamount to eating in a different fast food restaurant every day in the belief that you might be getting a wholesome diet, to be suddenly surprised that you have become obese and come out in a ghastly sweat rash. Giving up eating out entirely as a consequence would be equally foolish, as beyond the high street chains, there are plenty of decent eateries offering nourishing value for money, ?if one only cares to make a bit of an effort in the search.

The industry certainly didn’t seem to be getting much in the way of sound advice from the consultants who seem keener to perpetuate the myth, either out of pure schadenfreude, or more likely because they see an opportunity to step into the breach and manage money themselves. Towers Watson has for years taken the moral high ground in preserving its independent advisory status, whilst all around sold out to allure of multi-management. Today, it too is nothing more than a money manager, competing directly with industry participants of which it purports to be the arbiter.

Separately, someone from Franklin Templeton, once an active manager of some renown, seemed also to be trying to stake a claim to the replication pie.?I couldn’t help thinking ?Sir John will be turning in his grave?. Yet, with outperformance becoming almost a statistical impossibility given the size of the world’s seven largest asset managers, who now account for almost seventy percent of 60 trillion dollars of equity investment, it is not surprising that there is nowhere else for these behemoths to go.

According to a recent ariticle in the Economist magazine, Blackrock manages something like 15 percent of the total equity AUM, 3.5 percent through its funds, and over 11 percent through its fund replication advisory services. Their systems send buy and sell signals to a wide variety of financial institutions around the world, that then kid themselves and their investors that they have some real, internal asset management expertise, but in fact they are simply delivering the perennially market-lagging algorithms that drive Blackrock’s business.

All this sounds deeply depressing. Not only are the largest asset managers, without doubt, a systemic risk to the financial system, as they are all following the same index-hugging approach, but investors are also being denied true alpha, constantly fed a diet of consistent relative underperformance by fund managers, who now earn way more that the investment bankers they used to scorn. This insidious money-gathering machine is more often than not the only choice the poor punters are offered. Private banks and wealth managers seem invariably to offer only these big names.

Alternative or “Smart” Beta is another rather nauseous concept dreamt up by academics with nothing better to do. Unfortunately, it appears to be taking root as a credible alternative to managing money, despite highly dubious results. The concept that one can replicate various types of beta through machines rather than using the human brain to capture beta and alpha, takes comfort from the notion that the mainstream asset management world is content to deliver the minimum feasible return to its clients, often captive investors i.e. pension fund allocations or insurance wrappers, and denies the ?very existence of the multitude of boutique specialists and regional asset managers whose alpha-generating skills are quite apparent as soon as you move away from comparisons based on mean returns.

So mean returns are being delivered up by both the “Shiny Suits” and the machines, less fees of course. The machines deliver the mediocrity at?a slightly cheaper price. ??Former Henderson Multi-Manager John Husselbee published an interesting, sharp rebuke of the naysayers in his regular blog this week. saying?that whilst, as we have postulated, alpha is indeed difficult to come by versus the main indices of US equities, ??where information is more efficiently distributed across the market participants, this changes manifestly as soon as one moves away from the mainstream indices. ?In emerging markets this is even more obvious as soon as one moves away from the indices?, which are invariably skewed towards state owned enterprises, commodity giants or financials, and rarely give one true exposure to domestic GDP growth, or growing consumerism.

Simon Hopkins? – Milltrust?s EMMA funds ? investing with the best of breed in emerging markets?