Asset managers are feeling much less pain than headlines of ‘cataclysmic impact’ and zero-fee rush would suggest
.jpg)
Fee pressure has become an undeniable force in the fund industry, particularly as higher-cost active funds have generally failed to beat the market. But according to McKinsey, the story among North American asset managers isn’t so clear-cut.
“Headline fee rates have fallen significantly since 2013—some 25 percent overall for both retail and institutional funds,” the firm said in a report titled Beyond the Rubicon: North American asset management in an era of unrelenting change. “But behind those headline averages is a wide variation by asset class and strategy.”
Based on figures from Morningstar, McKinsey noted that fee pressures were much more contained in high-demand segments of US-domiciled mutual funds and ETFs. A survey of 2018 total expense ratios indexed to 2013 revealed a 11% drop among active specialty fixed-income funds; 15% for active specialty equity funds; and 16% for active core equity funds.
“On the other hand, fee pressure for commoditized asset classes and strategies was massive,” the McKinsey report said. “Pricing pressure was real, but it played out very differently in different parts of the industry.”
The brunt of fee pressure went to passive strategies. From 2013 to 2018, total expense ratios for passive multi-asset funds decreased by 28%; passive equity funds saw a 33% decline, while passive fixed-income mandates went down by 39%.
And while headlines have predicted a “cataclysmic impact of fee pressure,” the report’s authors noted that asset managers felt a more muted impact. Asset management businesses focused on retail channels, they said, saw their revenues fall by 6% for every dollar of assets managed, compared to an average 25% decline in fund-level fees.
The difference in compression rates, the report said, came from different sets of dynamics that affect disparate parts of the fee pool. That includes greater pressure on distribution-related expenses fuelled by client demands for greater transparency, “clean” share classes, institutional product vehicles such as separately managed accounts, and a preference for ETFs over mutual funds.
The report also noted that while the introduction of zero-fee funds in 2018 were characterized as a shot across the bow by “a few bold managers,” their story has played out much less dramatically since then.
“Our analysis shows that the top 12 zero-fee funds in the market captured a grand total of about $25 billion in 2018—certainly not an unimpressive figure, but also not one that signals an industry being turned on its head,” the report said. Most new assets reportedly ended up concentrated in just four funds, which typically amounted to less than 2% of the flows captured by their respective sub-asset class categories.
Zero-fee funds, the firm said, were far from an industry-wide trend. Rather, they were fundamental shifts in business models among a handful of vertically integrated sponsors betting that the customer acquisition in their distribution arms will more than offset losses from waiving their nominal manufacturing costs.
