Fairies are generally pleasant, helpful sorts. The Tooth Fairy, Tinker Bell, the list goes on.
But, warns Ian Toner, director of strategic research at Wurts & Associates, Seattle, beware of the Cost Fairy. In a research note on the effects of costs on investment portfolios, Wurts created the Cost Fairy — a fee-grubbing evil twin to the Tooth Fairy — to exemplify how pension funds need to take a good, hard look at the costs of asset servicing such as custody, transition management and foreign-exchange trading.
Like the Tooth Fairy, “the Cost Fairy will come into your room at night if you leave a tooth under your pillow and take it away. Unlike his relative, though, he won't leave anything for you,” Mr. Toner said in the note. “And sometimes the Cost Fairy will break into your house without you expecting it, and if he doesn't find a tooth under your pillow, he'll just take the one you're still using. There's no return from the Cost Fairy, only downside.”
The note, titled “Costs Ate My Alpha,” points out that reports of manipulations of the LIBOR rate and FX pricing and mispricing in transition management all have cost ramifications for investors. Mr. Toner said costs should be viewed in the context of alpha, with cutting costs easier than finding new alpha sources.
“The point of the Cost Fairy is, if you can put a smile on people's faces around a real problem, maybe they'll think about it,” Mr. Toner said in an interview.
