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INVESTING
E XCH A NGE T R A DED PRODUCTS
30 September 2018
Record global growth for passive products
T
he Boston Consulting Group (BCG) has published an expansive new report, Global Asset Management 2018: The Digital Metamorphosis. Among its findings is that value of global assets under management (AUM) rose by 12% to $79.2tn in 2017, from $71.0tn in 2016. This represented the strongest annual growth since 2009, when assets rebounded from the depths of the global financial crisis the year before. The report also states that among asset management products, passives were the fastest-growing category by far in 2017, with a record 25% increase in AUM. “Traditional active products continued to lose share against solutions and specialties. Active now represents just one-third of AUM, compared with 57% in 2003, even though strong flows in active fixed income more than compensated for outflows in active equity.” (Solutions, specialties and alternatives now own 50% of the market, versus one-third in 2003.) Much of the year’s passive growth came by way of record net new flows into passive products, helped by the strong performance of equities markets, where most passive funds are invested. “The results confirmed investors’ continuing shift to passive strategies, both in the retail segment (thanks to transparency and, in particular, the distribution fee ban) and in the institutional segment.” The report adds that “unfortunately, the growth of passive AUM provides limited revenue to asset managers”. Passive assets, valued at $16tn and representing 20% of AUM in 2017, produced revenues of $17bn – just 6% of the industry’s total revenues. “Although passives are increasingly popular, their margins are slender. Players should therefore focus on identifying higher-fee growth opportunities.” Banking on smart beta One option for passive players is smart-beta products, which passively track an index but include an active, rules-based component. “Although smart beta is still a small category, with just $430bn in AUM or 0.5% of the global total, it has grown by 30% a year since 2012. In the future, smart beta will pose
a substantial threat to traditional active players – potentially even greater than that of the overall shift to passives. That is because smart beta seeks to replicate active management results at lower cost to investors,” the report states. Fee levels for smart beta equity funds average about 35 basis points, well below the average of about 50 basis points for active equity products. “We believe that smart-beta growth
Traditional active players tempted to capitalise on this growth will need to take advantage of scale and an industrialised approach to be profitable.” Zero, zilch, nada Meanwhile, Boston-based Fidelity Investments has fired a major bombardment in its low-fee index fund war against rival Vanguard by launching two stock index funds with
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will become a driver of organic zero expenses. The two new funds are consolidation in the industry going the Fidelity Zero Total Market Index forward. The winners in smart beta Fund (FZROX) and the Fidelity Zero should be able to leverage their scale, International Index Fund (FZILX.) along with any early The total market index investment they fund seeks to provide make in relevant data investment results that AMONG ASSET infrastructure, to correspond to the total maintain lower fees return of a broad range MANAGEMENT than those that follow.” of publicly traded PRODUCTS, The report adds that companies in the US. PASSIVES WERE The International the industry’s large passive players have Index Fund seeks to THE FASTESTdominated smart beta. provide investment GROWING “But a few large results that correspond CATEGORY BY active players, after to the total return of failing to join the foreign developed and FAR IN 2017 first-movers into emerging stocks. In passives, have joined addition to being zero the smart-beta fray, hoping to cost, both funds are offered with no capture some of the new opportunity. minimum to invest.
A decade ago, Fidelity and Vanguard were running neck-andneck when it came to AUM. Now Vanguard – the biggest provider of index funds – manages over double the assets that Fidelity does. By introducing the new zero-cost index funds, Fidelity appears to be on its way to changing that. In a company press release, Kathleen Murphy, president of Fidelity Investments’ personal investing business, says: “Fidelity is once again rewriting the rules of investing to deliver the unparalleled value and straightforward investing options that individuals need and deserve.” She adds: “We are charting a new course in index investing that benefits investors of all ages – from millennials to baby boomers – and at all affluence levels and stages of their lives. The ground-breaking zero expense ratio index funds combined with industryleading zero minimums for account opening, zero investment minimums, zero account fees, zero domestic money movement fees and significantly reduced index pricing are unmatched by any other financial services company.” What do these free index funds mean for financial advisers? Robin Powell of the UK’s Regis Media, posted a series of reactions on his blog, including these: “For the advice profession it’s good news and bad news. The good news is advisers can implement their advice for clients even more cheaply than before using low-cost or free funds. The bad news is that the trend toward unbundling and lower cost will not stop at investment products. Advice fees will come under further scrutiny, with enabling technologies like roboadvice and increasing transparency catalysing this trend.” - Jeff Ptak, Global Director, Manager Research, Morningstar “Investors will struggle to navigate the flurry of index funds, creating an opportunity for sophisticated advisers to help them distinguish between smart innovations and gimmicks. And it’s not a moment too soon because the days of fund companies paying advisers to sell their wares are ending.” - Nir Kaissar, financial adviser and Bloomberg columnist