Flash in the pan or game changer?

Fidelity’s recent launch of four zero-fee indexed funds has attracted a mixed reaction.

Some see it as a minor ratcheting up in the price war between the mega indexers. Like climate change, they argue, fee models change in tiny steps.

Others see it as a tipping point.  Not only are passive funds now a strong money magnet, they are also enabling index providers to enjoy the so-called network effect. Zero fees, it is argued, will create new revenue streams by cross-selling across the expanding client base, at the expense of specialist active managers.

That fees are a slow-burn issue in global asset management because of its large pool of legacy assets is undeniable. That the price war in the passive space has been causing fee compression in the active space is equally undeniable. The truth, as ever, is somewhere in between – for now.

The media have so far focused on private equity and hedge funds. The change, however, is just as evident across the active space.  Only those managers delivering their benchmark returns have remained immune in this decade.

For the rest, fee pressures have intensified like never before.  And all the more so, since QE has brought forward future returns and turned fees into a key source of outperformance.

Managers are increasingly enjoined to eat their own cooking under the emerging fee models, as fees have become the North Star of the industry.

If you’re a subscriber to the Financial Times, you may be interested in fuller details in an article I wrote for FTfm today, 17th September 2018.

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