Since the global economic downturn, banks have become an easy target, and their most obvious adversaries are politicians, regulators, the media and even the public itself. Nevertheless, some argue that the greatest threat banks face comes from a non-obvious source: investment managers.
Worth noting as well is the likelihood is that the biggest winners will be those groups with a strong presence in passive funds. PwC predicts that passive funds will triple in five years, and that transition will largely be due to increasing interest in fee transparency. Fee transparency is another significant form of checks and balances that have not traditionally affected banks.
As an emphasis on fee transparency continues, a likely result is that investment managers become increasingly motivated to create investment products that are accessible and low cost. Assets in institutional mandates and mutual funds could rise by as much as 30 percent in five years.
If that occurs, the largest, most active fund houses, including Aberdeen Asset Management in the U.K. and MFS in the U.S., would face course-altering decisions. Would they stick with the funds where their traditional expertise is, or would they transition into the passive industry, by either organic growth or acquisitions?
One thing is certain, passive funds are here to stay. At this point, it really is not a matter of whether PwC is correct only to what extent are its forecasts accurate. What this means for fund managers in the short term is increasingly aggressive pricing, which will put great pressure on current fees for active funds.
Fitch Ratings, a global rating agency, agrees with this assessment. In fact, Fitch expects an almost immediate increase on the institutional side of asset management as investors lean toward passive investments. It recommends that providers begin meeting the demand for low-cost solutions now.
The biggest companies should be able to cope with this change easily. Small fund companies, particularly those that focus on niches and nimbleness, should flourish as well since they can attract assets from the large companies. The mid-sized companies, however, may be in trouble, and they will likely require some outside-the-box solutions in order to withstand the change.
As an financial professional, how does this trend toward passive funds affect you?