Actively-Managed Funds Feeling The Fee Compression Heat - Cerulli

Tom Burroughes

21 May 2018

The index-fund juggernaut has put asset management under pressure because of its low fees and the Alpha-chasers in the actively managed part of the industry are also feeling the heat.

in Europe, faring well as a result. The trend is part of why a common refrain has been that asset management will see more consolidation, squeezing out mid-size firms and leaving only boutiques at the specialist end.

But as the decade-long bull market in equities has given passive investors an easy ascent, the case for the index-tracking approach might hit trouble if markets flip over. And there may not be much further room for passive funds’ fees to come down – so the pressure is switching to fees on the active side, according to Angelos Gousios, director of European retail research at Cerulli, said.

Aside from the odd single basis point, passive fees cannot fall much below the current lowest levels of around 5-6 bps, Cerulli said. "Running and trading investment funds costs money; even a cheap tracker fund has dealing costs," Gousios said in a report.

The ability of a low headline fee to attract capital is becoming increasingly muted. "Investors know that cheapest is not necessarily best. Greater attention is being paid to how funds are managed," he said.

The fee compression trend has been noticed for a while. In response to investors moving money to index funds and low-cost actively managed funds, more US equity funds cut their expense ratios in 2017 than in 2016, a report by Morningstar in February this year said. The fund tracker and analytics firm said it examined the expense ratios for actively managed funds that invest predominantly in domestic stocks.

Last year, BlackRock, the world’s largest listed fund manager, shifted some of its teams from the actively managed fund space, a move seen as a sign of how index funds have squeezed the sector.