The cut-throat price war among US asset managers intensified last year as mutual funds with the lowest fees won by far the most investor inflows, according to the Investment Company Institute, the trade association.
Fees are becoming crucial in determining success or failure for investment managers, particularly in the US where actively managed funds that aim to pick winning stocks have lost market share to low-cost trackers that follow a broad benchmark.
Forty-three per cent of US equity funds cut their charges last year, with active managers that invest in domestic stocks facing bruising competition.
Only the cheapest active US domestic equity funds — those priced in the lowest 5 per cent of their peer group with fees of less than 56 basis points — could attract positive net inflows last year. New business for this group totalled just $3bn in 2017, a disappointing result given the strong US stock market performance which ended the year at an all-time high.
The other 95 per cent of funds, which charge fees of 56bp or more, suffered combined outflows of $275bn, according to ICI’s analysis.
“Competition continues to push down expense ratios as the industry meets cost-conscious investors’ demand for lower cost funds,” said Shelly Antoniewicz, ICI senior director of industry and financial analysis.
Boston Consulting Group said downward pressure on fees was intensifying because of increased competition among asset managers for the business of large institutional clients and the growing bargaining power of large distributors selling funds to retail investors.
Brent Beardsley, a senior partner at BCG, said a “winner-takes-all” trend was becoming stronger.
Vanguard, the world’s second-largest asset manager and historically the most aggressive competitor on fees, has gathered record breaking inflows for six consecutive years. BlackRock, the world’s largest asset manager, enjoyed its best year, pulling in $367bn in net cash. BlackRock and Vanguard have played a major role in escalating a price war that has drawn in other passive fund managers, including State Street and Charles Schwab.
The ICI analysis indicated that fee competition among passive managers had a significant effect on investor inflows into tracker funds.
The cheapest quartile of domestic US equity trackers, with fees of less than 20bp, had inflows of $208bn in 2017. The remainder could only attract $20bn.
A similar but less extreme split in flows was registered in passively managed international equity funds, and also bond and hybrid trackers.
Divyesh Hindocha, a partner with Mercer, the investment consultant, said institutional investors were well placed to assess the risks and rewards of active management “but retail investors may be predisposed to focus purely on costs which should really be a secondary consideration to the quality of the fund offering. This could be harmful to wealth creation for retail investors,” he said.
Mr Beardsley said profit margins for asset managers would fall. “Asset managers may know what is coming but they still have to take the actions necessary. Some bold moves will be required.”
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