Active asset managers are on the precipice of a $74 trillion problem, according to Bloomberg. Every day investors that have been frustrated by poor returns and higher fees are shifting their money out of actively managed funds and into passively managed funds, as we have documented on this site for sometime.
As we have noted, this has sent fees much lower, while forcing active managers to make job cuts. This means that the $74 trillion industry is on the verge of what will likely be a historic shakedown where only the best managers will survive.
Philip Darling, head of partnerships at The Buy-Side Club said: "We're clearly at a watershed moment".
The analysis looked at fees, personnel and performance data across the industry and revealed how difficult the environment has truly become.
Ben Phillips, principal and investment management chief strategist at consulting firm Casey Quirk said:
"The combination of fee competition, rising costs and asset growth is creating never-before-seen pressures on asset managers. That creates a really bitter cocktail for an industry that never had to worry about fixed costs, fees or money showing up. The entire industry has been caught flat-footed. Nobody saw it coming. That sounds a little glib, but nobody acted to get around the corner first.”
Investors have done nothing but make a beeline into passive investments in recent years. Index funds are going to overtake active management by the year 2021, according to estimates issued in March by Moody’s Investors Service.
And this isn't the first time that active management has been criticized. Princeton University economist Burton Malkiel in 1973 "compared the prowess of money managers to a blindfolded monkey throwing darts to pick stocks".
Additionally, Jack Bogle, who founded Vanguard, often noted that he thought active managers weren’t worth the fees that they charged.
Regardless, this sentiment never really caught on until the financial crisis of 2008. Even after market started to bounce back, a lot of managers couldn’t recover.
Bill Miller, who beat the S&P 500 for 15 straight years beginning in 1991, hasn’t been able to match his previous performance since 2005. Bill Gross retired this year after failing to live up to his four decade career long performance.
Peter Lynch's Magellan Fund at Fidelity, which once went from a $20 million fund to a multibillion dollar fund isn’t even in the world's top 25 mutual funds now. Only 3 of the top 10 funds worldwide are actively managed funds.
The world's largest asset managers are the ones that are reaping the benefits of the new environment. They’ve been able to keep expenses down and lower fees due to their large size and are the companies that are likely to offer both passive and active management options. Blackrock and Vanguard now oversee a combined asset total of about $12 trillion, which is up from less than $8 trillion just five years ago.
Many other active managers are trying to realize savings and trimming staff. Others are consolidating.
Kathrin Hamilton, a partner at Baillie Gifford said:
“Should all active managers survive? A lot of firms have been focusing on accumulating assets rather than delivering outcomes for their clients. If there is indeed a shakeout, let’s not assume that’s a bad thing.”
A lot of the pressure continues to be on fees and firms now find themselves in a war to see who can push down fees the furthest. Some have even offered negative fees, as we wrote about earlier this year.
Yves Perrier, chief executive officer of Amundi said:
“The entire financial sector is being challenged by pressures on margins and this trend is going to continue due to very low interest rates. The industry is also being challenged by the development of passive management.”