Academics promoting passive investing have argued that active managers do a poor job of beating their respective benchmarks. Fees are the most cited reason for this underperformance, with a higher fee structure prompting investors to reconsider the value they are getting.

This is combining with regulatory pressure and increased transparency, highlighting the ever-present importance of considering fee structures in the investment selection process. Yet, to comprehend the fee drag at a portfolio level, one must consider both the absolute level of returns that can be expected as well as the potential for gain. To illustrate, we must consider whether an investment can generate value, and this is commonly achieved by dealing with the dispersion of returns.

Dispersion can mean different things to different people and is especially sensitive to the way one defines it. Yet, most commonly, people think of dispersion as the range of outcomes that can be expected. For instance, in the chart below we show the history of the broad global equity universe – illustrating the gap between the strongest performers versus the weakest, by assessing 47 key country markets and the gap between the 10th and 90th percentiles over five-year rolling periods.