Passive fees “could go to zero”

Can you imagine a world where passive funds are provided free of charge in an ultra-competitive asset management industry? Angana Jacob of S&P Dow Jones Indices (SPDJI) has. She says that because passive investing is a scale business, “fees can only go one way” and speculates the time may come when large investment houses offer passive fund ranges free of charge, using them as a loss-leader while trying to make active management more profitable. Jacobs, an associate director at SPDJI, says: “If large players decide to employ a loss-leader strategy to attract investors, we could see business models developing around charging high fees for active and multi-asset business lines, while the cost of core pure passive strategies go all the way to zero.” Jacob’s comments are in a report she has penned called ‘Fees heading to zero – are we there yet?’, available here. She notes that in the past ten years 95% of new flows are to the lowest-cost quintile of funds. Jacobs says that over five years from 2009 to 2014, more than 60% of all funds in the Morningstar database reduced their expense ratio. Actively managed funds in Europe charged 5% less, whereas passive products charged a “staggering” 42% less. On top of this ETFs have grown 73% in five years, and this rise has been assisted by a massive drop in fees. Smart beta, meanwhile, is creating a level playing field for returns and fees are the only differentiator. “Within the smart-beta world, by definition the return of all traditional cap-weighted index funds covering the same market should be equivalent, resulting in beta being commoditised and manager left competing on price alone,” Jacobs said, noting this could result in a “race to the bottom”. Loss-leading pricing strategies for asset managers, Jacobs says, would be to offer core pure passive ranges for free in order to retain scale benefits, and make profits on smart beta/active products and other business lines, such as multi-asset solutions. ©2016 funds europe

Executive Interviews

INTERVIEW: ‘It is what it is’

Dec 22, 2016

Jeff Conway, regional chief executive for State Street, talks to David Stevenson about regulation and how the firm will handle the challenge of tech disruption.

MASHREQ CAPITAL INTERVIEW: A new direction

Dec 22, 2016

The new chief executive of Mashreq Capital talks to George Mitton about fund launches, management style and why he is the right person for the job.

Roundtables

SEC LENDING ROUNDTABLE: Both a borrower and a lender be

Jan 11, 2017

Industry heavyweights, including agent lenders, discuss issues affecting the securities lending sector such as regulation and the types of collateral being used.

EMERGING MARKETS ROUNDTABLE: The re-emergence

Jan 03, 2017

2016 was the year emerging markets returned to the spotlight, as they regained ground since the 2012 sell-off. Funds Europe asked our panel if this appetite will persist in 2017.