📰 Fund Managers Forgo Billions in Fees in Race to the Bottom

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Estimated read time: 3 minutes

Hey 👋!

Welcome back to another issue of Finance Focus.

Today’s article dives into the shifting landscape of asset management as revealed by a recent study by Morningstar. With US fund investors saving billions due to a significant move from mutual funds to ETFs, the implications for asset managers are profound.

The data shows a marked preference for low-cost, passive investment vehicles, presenting both challenges and opportunities for the industry.

The article also considers the strategies asset managers are employing to adapt and the potential future of investment management.

Here’s the article. Scroll down to read my key takeaways and thoughts on the topic.

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📰 Fund Managers Forgo Billions in Fees in Race to the Bottom

TL;DR: Asset managers lost billions in fees as US fund investors shifted from mutual funds to cheaper exchange traded funds (ETFs) in 2023.

Morningstar's study shows a continued decline in average expense ratios and a significant redirection of investments from actively managed funds to passive ones.

Although firms like Dimensional have adapted by offering actively managed ETFs, this shift has also led to lower fees and internal competition.

While fee pressures persist, there are signs of stabilisation with some funds even raising fees.

Key Takeaways:

1. Significant Fee Savings: US fund investors saved nearly $3.4 billion in fund expenses last year, with the average asset-weighted expense ratio dropping from 0.37% to 0.36%.

2. Shift to Passive Funds: Actively managed funds saw large outflows, with money moving to cheaper passive funds. In the last two years, passive funds attracted over $1.1 trillion in net new money, while active funds lost almost $1.4 trillion.

3. Active Managers Adapting to ETFs: Firms like Dimensional have successfully entered the ETF market, though this has led to lower fees and competition with their mutual funds. Active ETFs are generally cheaper than their mutual fund counterparts.

4. Persistent Fee Pressure: The demand for low-cost funds remains high, with the cheapest 10% of all funds cutting fees nearly in half over 15 years. The cheapest 20% of passive funds garnered 90% of all inflows in the past two years.

5. Signs of Fee Stabilisation: Both Morningstar and FactSet indicate fee pressure might be bottoming out, with some funds starting to raise fees. This change is partly due to outflows triggering automatic fee adjustments.

Personal Thoughts:

1. Impact on Asset Managers: The ongoing shift from mutual funds to ETFs highlights the need for asset managers to adapt to investor preferences for lower-cost options. This transition is challenging traditional revenue models, but it also opens opportunities for innovation and efficiency improvements in fund management.

2. Investor Benefits: The trend towards lower fees directly benefits investors by reducing their investment costs, potentially leading to better net returns. This shift underscores the importance of transparency and competition in the financial industry.

3. Future of Active Management: While passive funds continue to dominate inflows, there is still a role for actively managed funds, particularly those that can demonstrate consistent performance and value. Asset managers need to balance cost management with delivering superior investment strategies.

4. Regulatory Considerations: As the industry evolves, regulatory frameworks may need to adapt to ensure fair competition and protect investor interests. Continuous monitoring and potential adjustments to regulations could help maintain a healthy financial ecosystem.

5. Long-Term Outlook: The finance industry is experiencing significant changes, driven by technology and shifting investor behaviours. Asset managers who can navigate these changes effectively will be well-positioned for future growth and success.

That’s all for today. In case you missed it: 📰 Morgan Stanley's Wealth Business Struggles

See you tomorrow!

Afzal

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