Asset Managers Are Racing Each Other … to the Bottom

Asset Managers Are Racing Each Other … to the Bottom

The average “expense ratio” of a U.S. equity mutual fund dipped to 0.55 percent in 2018, down from 0.59 percent the year before and almost half the cost charged by asset managers at the turn of the millennium, according to data from the Investment Company Institute (ICI).

SourceTakako Watanabe/Getty

Why you should care

Investment funds are slashing fees so freely that it’s been nicknamed “feemageddon.”

In addition to pruning fees on active strategies, many asset managers have launched competing passive funds at rock-bottom prices to gain market share. The ferocious price war has intensified this year, with investment groups such as BlackRock and JPMorgan Asset Management cutting fees to stay competitive.

The phenomenon has been dubbed “feemageddon” by some analysts. Coupled with a massive migration by investors from active funds to cheaper passive ones, it sent the shares of listed U.S. asset managers down more than a quarter in 2018 — the worst annual performance since the financial crisis.

Fees on U.S. equity funds fell to a new record low last year, as relentless pressure from cheaper index-tracking rivals forced asset managers to slash costs in a bid to staunch heavy outflows.

The average “expense ratio” of a U.S. equity mutual fund dipped to 0.55 percent in 2018, down from 0.59 percent the year before and almost half the cost charged by asset managers at the turn of the millennium, according to data from the Investment Company Institute (ICI). Expense ratios track the percentage of assets deducted each year for costs associated with management, record-keeping and other administration.

“The industry is going through dramatic changes,” said Martin Flanagan, head of Invesco, in a recent interview with the Financial Times. “Winners and losers are being created today like never before. The strong are getting stronger and the big are going to get bigger.”

The stocks of investment groups have rebounded about 12 percent this year, but industry executives remain gloomy about the sector’s future, predicting a swath of consolidation and even closures in the coming years. Flanagan said that as many as a third of asset management companies could disappear in the coming five years.

In a report on the industry, Morgan Stanley analysts estimated that revenues from actively managed funds in developed markets would shrink 36 percent by 2023.

Some analysts have predicted that as passive investing becomes more prevalent, markets will turn more inefficient, opening up lucrative opportunities for active managers. But with so many fund managers falling by the wayside, outperforming passive funds could become even trickier, Moody’s warned last week.

“Over time, only the best players will survive, leading to a more difficult game,” the rating agency said in a report. “Similarly, active management could become more difficult over time, as a growing number of below-average active managers drop out or see their assets continually decrease.”

The report predicted that assets under management by index-tracking funds will overtake those in actively managed funds by 2021.

Last year passive equity funds sucked in $472 billion, while active ones shed $488 billion, according to EPFR. Exchange-traded funds, which have become the most popular form of index-tracking vehicles thanks to their easy tradability, have attracted another $85 billion this year, according to Bloomberg data.

The average expense ratio of bond funds stayed steady at 0.48 percent, according to the figures from the Washington, D.C.–based ICI, but both index-tracking funds and actively managed vehicles saw their costs dip last year, with the average expense ratio of the former falling to 0.08 percent and the latter declining to 0.76 percent.

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By Robin Wigglesworth

OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2019.

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