Passive fees tipped to fall further
Specialists have predicted the “race to the bottom” on UK passive fund charges has further to go, in spite of the significant price cuts seen in the space this year.
Last month Fidelity cut ongoing charges on a range of tracker funds in the UK to as low as 0.06 per cent, setting a new standard for prices available to advisers.
In the US, however, where the passive industry benefits from even larger economies of scale, exchange-traded fund (ETF) prices have fallen lower still.
Both BlackRock and Charles Schwab cut headline passive fees to just 0.03 per cent earlier this month, and some commentators expect further downwards pressure in the UK – albeit chiefly on the most visible products.
Nutmeg chief investment officer Shaun Port thought the so-called “Vanguard effect” could continue to lower fees in Europe, particularly as competition in the market had increased.
He said: “The fee cuts in the US are part and parcel of the Vanguard effect. Whenever you see [Vanguard] enter a particular segment of the market, its rivals have to become more competitive.
“In Europe, you are seeing this effect as well [in the form of] more competition from names such as UBS.”
But Mr Port cautioned price movements could be much slower beyond providers’ core product ranges.
He said: “We are seeing fee cuts across core products, but it’s much more glacial beyond these. There is competition among the more peripheral products but it goes at a much slower pace.”
In the UK, Fidelity’s cuts followed similar moves by BlackRock, Legal & General Investment Management (LGIM) and Vanguard during the past 12 months.
Others to slash fees recently include HSBC Global Asset Management, which this month dropped the ongoing charge on its American, European and FTSE All-Share index trackers in response.
Kleinwort Benson senior discretionary fund manager Paul Surguy agreed the price war could gain momentum, but he warned fees were not the only important factor for investors.
He said: “It’s a race to the bottom. We don’t know how low providers can go, but I think fees will go down further because someone will buckle first [and lower charges] and then the others will follow.”
But he added: “Headline prices are one thing to look at, but we need to see the total cost and how the provider is doing the tracking.
“Tracking error is one of the most important factors. We want to get as similar a return to the market as possible.”
Vanguard head of UK retail Nick Blake noted price cuts could persist at a commercial detriment to some market players. “I hope charges will continue to fall as scale allows,” he said.
“We have a structural advantage because as a mutual we are obliged to run our business at cost. But other shops have this careful balance between returning value to customers and to shareholders.”
Earlier this year ratings agency Moody’s claimed the growth of passives had come at a cost to providers, using its October Credit Outlook statement to warn the price war was “credit negative” for companies operating in the space.
Moody’s said: “These attempts to attract a greater share of assets are credit negative for all managers of passive strategies, because they will squeeze their margins while chasing assets.”
But the latest Pridham Report, which monitors fund flows, noted the commercial benefit of such fee cuts.
It in part attributed LGIM’s sales increase of more than 100 per cent – to £757m in net retail sales for the third quarter of 2015 – to lower charges on its passive range.
