Heavy competition from low-cost passive investment options and super funds have meant active fund managers will have to lower costs or prioritise “niche and exotic” asset classes to maintain a unique value proposition to the market.
A key finding in Morningstar’s Australian Asset Manager report for 3Q24 is that asset managers will need to improve performance, cut costs, better align remuneration with shareholder interests, and increase investments in distribution.
Morningstar equity analyst Shaun Ler says the biggest cost for asset management businesses is paying staff.
“If a firm isn’t offering the kind of value and investment returns then maybe staff shouldn’t remunerated that much,” Ler tells Professional Planner.
“Gone are the days where people can afford to pay huge salaries. You can pay huge salaries if you deliver value, and if you can’t deliver value those costs would have to come down.”
The researcher believes there will be further fee compression through to FY29 among the managers it covers.
The past few years have seen active managers under pressure to justify higher fees than passive managers, particularly during underperformance in equity markets.
The finding follows similar comments by Zenith earlier this year that fee compression has made the Australian market unattractive to the best overseas fund managers.
Ler says that ultimately, active managers struggling to outperform will need to reduce their fees, noting recent comments from newly-crowned Perpetual chief executive and former Australian Retirement Trust CEO Bernard Reilly, who told the Australian Financial Review of his plans to slash costs at the struggling asset manager.
“It’s a chicken and egg problem, right?” Ler says.
“If you can outperform consistently, you can justify your fees but if you can’t then you’ve got to reduce your fees and you’ve got to reduce your costs to retain that profit margin.”
The Morningstar research found active managers are more likely to cede share in traditional asset classes, but non-traditional asset specialists – particularly in private debt, private equity, and specialised fixed-income strategies – are better placed to thrive.
The research found low-cost ETFs are winning market share in traditional asset classes, particularly equities, while industry funds are also experiencing net inflows.
Industry funds are putting pressuring on managers’ fees due to default choice, mandatory contributions and the ability to tap into a broad range of investment opportunities including the much-fabled unlisted market.
Morningstar believes traditional active managers’ competitive position is weakening overall but this can be mitigated by diversifying into “niche or exotic products”, which passive strategies have yet to replicate at a similar scale.
“With ETFs being able to replicate many active investment strategies, active managers need to re-think their value proposition,” Ler says.
“Product diversification is one thing. Certain funds in Australia are still getting very good inflows, for example Metrics Credit Partners that focuses on other asset classes [non-bank lending and alternative investments], not equities, so that will be one way.”
But shifting from picking stocks on public exchanges to working on asset classes like private markets is far from simple, meaning fund managers without that skill set and expertise will struggle to pivot to in vogue asset classes.
“It’s along the lines of relationship building, what you can source, whether or not your deals are as attractive or safe as what other organisations can offer,” Ler says.
“It’s not just a bunch of guys coming together and picking stocks, so it’s not that simple. We’ve heard of trying of people trying to get into this space but I’m not too sure how this will look like but it’s not that simple.”
The seven managed fund providers covered in the report are Magellan Financial Group, Perpetual, Pinnacle, Platinum, Insignia Financial and Challenger.