US asset managers compete under the SEC observation

March 21, 2019, | AtoZ Markets According to the Institute of Investment Companies, the average “expense ratio” of the US mutual fund dropped to 0.55 percent in 2018 from 0.59 percent a year earlier and was almost half the cost charged by the US asset managers.

Pressure from the cheaper competitors contributes to the stock prices fall

Expense ratios track the percentage of assets deducted each year for expenses related to management, accounting, and other administration. The experts suggest that the main reason behind the low expense ratios is strong pressure from the cheaper competitors tracking indices. Due to this, the US asset managers had to cut costs in an attempt to stop a strong outflow. “The industry is going through dramatic changes,” said Martin Flanagan, the head of Invesco, in a recent interview. “Winners and losers are being created today like never before. The strong are getting stronger and the big are going to get bigger.”

The head of Invesco suggested that a third of the US asset management companies could disappear in the next five years.

The companies reduce fees to stay afloat

In addition to reducing fees, many US asset managers in order to gain market share, have begun to compete for passive funds at the lowest prices. Certain financial firms reduced fees to maintain their competitiveness. The price war between investment groups such as BlackRock and JPMorgan Asset Management that became more intense this year.

Shares of investment rise, but the future is still gloomy

Some analysts call the aforementioned phenomenon “femageddon.” Combined with the massive migration of investors from active funds to cheaper passive ones, this led to a drop in shares of listed US asset managers by more than a quarter in 2018, which is the worst annual figure since the financial crisis. This year, shares of investment groups jumped by about 12 percent, but industry leaders are still gloomy about the future of the sector, predicting consolidation and even closing in the coming years.

Morgan Stanley research draws gloomy future for the asset managers

In an industry report, Morgan Stanley analysts estimate that by 2023, revenues from actively managed funds in developed markets will decline by 36 percent. “Over time, only the best players will survive, leading to a more difficult game,” the rating agency said in a report. “Similarly, active management could become more difficult over time, as a growing number of below-average active managers drop out or see their assets continually decrease.”

Some analysts predict that as passive investing becomes more common, markets will become more inefficient, opening up lucrative opportunities for active managers.

But with so many fund managers, in the background, it can be difficult to beat passive funds, the experts have warned. The report predicts that assets under the control of index tracking funds will surpass active fund assets by 2021.

Exchange-traded funds getting more attention

According to the EPFR, last year, passive equity funds absorbed 472 billion dollars, while active – 488 billion dollars. According to the latest reports, the exchange-traded fund, which has become the most popular form of vehicle tracking indexes due to its easy handling, has raised another $ 85 billion this year. The average expense ratio of bond funds remained stable at 0.48 percent, according to ICI based in Washington, DC, but both index tracking funds and actively managed vehicles reduced their spending last year with an average expense ratio first to 0.08 percent, and the second dropped to 0.76 percent.

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