Monday Morning Memo: The Fund Industry Needs to Re-invent Itself

The study “Searching for Growth in an Age of Disruption” conducted by the consulting firm Oliver Wyman and Morgan Stanley Research, estimates a mere one per cent compound annual growth rate for the revenues of asset managers. According to the authors of the study, the slowdown in revenue growth is driven by a growing unwillingness by investors to pay asset management fees.

I assume that the increasing regulatory demand, which is adding additional costs, will also tie into the revenues of the asset managers and not all these costs can be passed on to investors. The authors of the study also assume that the high growth in passive products (ETFs and index funds) will not help to increase overall revenues, since the expected growth in assets under management will be largely offset by the ongoing price war. This leads, especially in the core asset classes, to falling fees.

Alternatively, the authors stated that active managers outperforming their benchmarks can still expect inflows in high-fee funds, especially if their products are at the aggressive end of the alpha spectrum. From my point of view this means that asset managers need to re-think their business models and decide if they want to stay in a market segment that is expected to face shrinking assets under management and an ongoing decrease of fees. Alternatively, they’d have to change their fund management approaches from benchmark driven management to real active management.

This would mean that the respective funds are no longer tied to a market benchmark despite the respective fund manager needing to be benchmark aware. I would expect that the returns of the funds would start to differ from the benchmark returns because of this. The fund management industry needs to understand that investors who pay fees for active management want their fund managers to be materially active rather than simply relatively “benchmark aware”.

Additionally, I think it is also time that asset managers review their policies on how they treat their customers. This means asset managers should increase the transparency of their products and their communication, as the current reporting standards of many active fund managers won’t be acceptable for future investors. Asset managers, therefore, need also to change their communication channels to succeed in a digitalised world.