Passive Makes Active Aggressive

Index-tracking trend forces active managers to cut fees to compete.
UK asset managers are reducing their fees for institutional investors, and they have the rise in popularity of passive investing to thank for that, according to investment consultant Lane Clark & Peacock (LCP).

According to a survey from LCP, the average total manager costs for UK defined benefit plans with assets of at least £500 million ($607.1 million) is 0.36%, down from 0.39% in 2010. Although this seems like a small amount, it equates to a decrease of approximately £140,000 per year.

LCP attributed the reduction in fees to the rise in popularity of passive investing strategies involving index-tracking products. LCP said that estimates of growth in index-tracking assets under management suggest these types of funds have doubled their share of the listed markets in the past 10 years. The firm estimated that index funds hold approximately $6.7 trillion, which is about 35% of all long-term fund assets.

“The popularity of these cheaper products has, in our opinion, forced active managers to reduce fees to compete,” said LCP in its report.

LCP said that before last year, investment managers could pay for third-party research in equity and bond markets by charging their clients increased commission charges for the brokers executing transactions. This, of course, meant that the investor was paying these costs, not the manager.

However, “since 2018, investment managers have had to account for these costs in a more transparent way and the vast majority have chosen to pay for third-party research themselves,” said LCP, which added that despite the increase in costs this has created, active equity mandates have experienced downward pressure on fees.

“On the face of it, competitive forces should be low with little pressure on managers to reduce fees,” said LCP. “But that is not what we are seeing at all—fees have been reducing. This can be explained by investors moving towards using cheap, systematic ways of managing assets, such as index-tracking products.”

The survey also found that the average fee for an active global equity mandate of £50 million has fallen 11% in just two years.

“There have also been notable fee reductions in multi-asset diversified growth funds, multi-asset credit, liability driven investment strategies, and passive global equity mandates,” said LCP.

LCP said that actively managed global equity fees have fallen in the two years since its last survey of investment management fees. The average annual fee for a £50 million investment mandate is now 0.65%, compared with 0.73% in 2017, a decrease of £40,000 per year, while corporate bond fees have increased by £35,000 per year.  

LCP admitted it couldn’t quite explain why fixed income strategies have seen a rise in fee rates, but said it could be due to pension fund demand for “bespoke and more sophisticated fixed-income strategies.”

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