There comes a time when an active manager says enough is enough. Faced with pressure from lower-cost alternatives and stricter regulation, alternative options are increasingly being pursued. The first of these – seeking to bulk up via merger or acquisition – has attracted plenty of scrutiny. The second, of the ‘if you can’t beat ‘em, join ‘em’ variety, has not been so high profile.
The absence of examination is understandable: this route is far less transformative, particularly as most active managers’ efforts to build a passive business remain in their early stages. But the more that take this path, the less likely it becomes that any of them will succeed – in the retail space, at least.
The passives space is a tough one in which to operate. The tracker market is already a closed shop: beating the 0.06 per cent being offered on leading products is unfeasible for new entrants. So the vast majority of managers turning to passives are looking to ETFs. Franklin Templeton is the latest example in the UK; plenty of others are still in the planning stages.
Here, too, there are problems. Vanguard and BlackRock control 55 per cent of the global ETF market between them; this percentage is growing year-on-year, even as the overall pie expands at a good rate. That’s because economies of scale help create a virtuous circle: more inflows mean more price cuts, which help inflows increase further.
The area where we are told things are still up for grabs is factor-based investing – the smart beta offerings that track a specific type of investment style. Providers are encouraged because there is more scope for margin than with traditional passive offerings.
Yet these funds are still failing to capture the retail imagination. Assets in these strategies are ballooning, but the bulk of flows are coming from the institutional space. And for those who are interested, the choice is fast becoming overwhelming.
There are now more than 500 smart beta products in Europe, according to Morningstar. This is far below the number of active funds, but the point of factor investing means many products will look pretty similar to one another. Sub-scale smart beta funds are an increasing problem for providers new and old.
Asset managers are optimistic by nature; they will believe the flows will come in time. A pessimist might counter that this is a vicious circle rather than a virtuous one. These new offerings aren’t garnering much in the way of inflows themselves, but the mere presence of more smart beta products in the market heaps yet more pressure on active fund fees.
Dan Jones is editor of Investment Adviser
