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60% of European asset managers considering launching low-cost active funds

Thursday, September 08, 2011
Opalesque Industry Update - Costs may be rising, but the barriers that allowed managers to command high fees are gradually being eroded. While changes are likely to be protracted with little homogeneity across countries and asset classes, a shake-up seems unavoidable. According to Cerulli’s latest publication: European Fund Fee Analysis, this focus on fees is prompting European fund managers to examine their pricing strategies and assess product development plans.

The rise in passive investing, regulatory change, mounting criticisms about punitive fees, overtrading, and closet indexing have forced active managers to address this issue and assess how they will remain competitive. For many, lowering fees may be an unavoidable move.

“Pricing power lies with the best performing managers and like the luxury goods industry, those that can command a premium will do so,” said Yoon Ng, senior analyst in Cerulli Associates’ London office. “However, the weaker players, those without strong distribution networks or performance, will find it increasingly challenging to justify fees against their beta peers. As profits margins come under increased pressure, some managers may struggle to stay in the race.”

While active managers and funds of funds (FoFs) face the greatest fee pressure, the active investment model is far from broken. “Passive funds only managed to outperform active funds in two of the five asset classes, namely mixed assets and commodities. Active funds have proved themselves superior over a three-year time period in equities, alternatives, and fixed income, even with management and administrative fees taken into account,” continues Ng.

While performance may vary by sector and time frame, it appears that active managers do, in fact, deliver value.

The game plan for active managers has been to launch emerging market equity funds to prove their premium as stock pickers, or leveraging investors’ risk aversion mentality with absolute return funds. These funds charge average fees of 2% & 1.6% respectively, and are the best-selling fund sectors to date.

However, managers increasingly recognize the need to be ‘all things to all investors” and many have diversified their business model to include active and passive strategies. Only one firm in the top ten leader board by AUM does not have a passive business arm.

In preparation for changing regulations, active managers that do not have an existing passive business have looked to launch low-cost active funds. Although recent launches have attracted significant media interest, low-cost active is not a new phenomenon.

Cerulli’s recent survey conducted in conjunction with Ignites Europe, shows that roughly half of all participants have existing funds with total expense ratios less than 1%, while more than 60% say they plan to launch or are considering launching low-cost active funds in the future. It is important to note that growth in the low-cost active segment will be driven, not just by active managers, but by index funds, ETF providers, and FoF assemblers.

The Cerulli Report shows that there is a place for both active and passive funds with different pricing points in investment portfolios. In order to stay ahead, active managers will have to be more innovative and make the most of features that are not commonly associated with passive strategies, such as income generation, capital protection, volatility management, and inflation protection.

(press release)

About The Cerulli Report: European Fund Fee Analysis
This report takes a critical look at the current fee changes within the fund segment and seeks to understand the changing dynamics that will introduce fee pressure and affect the profitability of active managers. Cerulli addresses fundamental issues such as fee trends, profitability, risks, and opportunities in a rapidly changing environment as well as regulatory concerns and manager analysis through a series of surveys and interviews with asset management firms. This report helps managers identify dynamics driving fund fee pricing and predict future movements. In addition, there are numerous examples of initiatives taken by managers to implement low-cost fund strategies.

About Cerulli Associates
Headquartered in Boston with offices in London and Singapore, Cerulli Associates provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments. Corporate website:Source

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