In Zenith’s view, these trends look likely to persist, which leaves the “plain vanilla” actively managed but low tracking error (index aware) managers/funds in “no man’s land”. That is, not attracting funds from either the cheap beta (index) supporters or the highly active, absolute return type supporters. In turn, this has real implications for some of the large institutions’ asset management businesses and/or funds that have large levels of funds under management (FUM) in low tracking error, but not overly cheap active funds.
In order to retain and attract funds inflow it would appear that these institutions will experience increasing pressure to reduce management fees on these funds significantly to be competitive with index funds, or alternatively launch a passive suite of unlisted funds or ETFs. Given the large levels of FUM in these products, realistically they do not have the choice of making them more active and less benchmark aware. This is particularly true in the domestic asset classes where FUM capacity constraints are much lower.
On face value, this polarisation of the funds management industry appears to result in the large institutions with large levels of FUM providing cheap index-type investment products, such as unlisted index funds and/or ETFs, while the boutique investment managers (who seek to control the levels of FUM) provide truly active, non-benchmark-aware investment products. This is not strictly true as the large institutions can also offer truly actively managed products if they limit FUM capacity in domestic asset class products. Alternatively, they can also “play in this space” by acquiring interests in boutique managers, as Challenger and NAB (via nabInvest) have already done.
It is also not safe to assume that all truly active managers will outperform. They won’t, and as a result not all will survive; but it appears those managers and products in the “no man’s land” of low tracking error, benchmark-aware products with higher management fees will struggle the most.
David Wright is a director of Zenith Investment Partners – www.zenithpartners.com.au
