Can Fund Managers’ Fee Cuts Win Back Clients?
Active and passive managers brought in one-third of the amount of money in the first quarter of 2022 as they did a year earlier. Blame volatility and competition from alternatives.
Fund managers plan to lower management fees further even after aggressive fee cuts in 2021.
This week, Capital Group, which runs actively managed funds, said it would reduce fees by 1 to 14 basis points on 18 funds. Although index giant Vanguard is always reducing fees, the manager recently announced a round of cuts, trimming expense ratios for four exchange-traded funds by 0.5 to 1 basis point. The fee cuts, albeit small in percentage and absolute terms, would still save Vanguard investors an aggregate $8.8 million and Capital Group shareholders, $20 million, according to the companies. Earlier this year, Dimensional Fund Advisors also said it would cut fees on 50 funds.
Last year, the average expense ratio that investors paid for 25,000 U.S. funds dropped 2.7 basis points from 2020, according to data that Morningstar Direct pulled for II. The data also showed that more than half of equity managers and 45 percent of fixed income managers cut their fees in 2021.
The results are based on an analysis of 25,039 U.S.-domiciled open-end funds and ETFs. More than 12,000 of the funds are equity products and over 6,600 are in fixed income.
The fee compression also comes at a time when traditional asset managers aren’t gaining as much in active or passive mandates from institutional clients. According to the latest report from Investment Metrics, the total assets gained by both active and passive managers dropped from $106 billion in the first quarter of 2021 to only $31 billion in the first quarter of 2022. And passive strategies are having an even harder time meeting investors’ expectations amid heightened public market volatility. This year active managers at least proved they could protect investors in some sectors, including emerging markets. According to IM, passive managers’ share of new mandates was 17 percent of the total in the first quarter of 2022, down from 25 percent in the same period last year.
Scott Treacy, research consultant at IM, said the rise of private markets is a major reason why public asset managers are losing appeal for investors. “We saw a lot of activity coming out of public equities and going into other asset classes as people are trying to be as diversified as possible,” he said in an interview.
Vanguard’s fee cuts are simply the result of improved economies of scale and operating efficiencies — it returns those to shareholders in its funds. But Capital Group pointed out that lower management fees are an edge it has over its competitors. The move to cut fees on 18 products would put the company in the lowest quintile of fees within its peer group.