Displaying items by tag: asset management

The so-called “feemageddon” in the asset management industry has been unequivocally good for investors. Fees have dropped across the board, starting with ETFs, but also flowing through to actively managed mutual funds. However, the downward pressure on fees has also created interesting new fee structures. The first one to discuss is the most obvious—free funds. Both Fidelity and Sofi have introduced free index mutual funds and free ETFs, so the line in the sand on fees has been crossed. Other firms, such as Westwood Holdings and AllianceBernstein, have come up with entirely new concepts. AllianceBernstein has a “Flex Fees” actively managed mutual fund which has a low basic fee (ETF-level fee) and then only charges a mark up if it outperforms, offering much better economics to investors. Westwood Holdings, has a little bit different but similar fee arrangement which tries to mitigate the potential for misaligned incentives in “fee only when you outperform” structures, which incentivize portfolio managers to take risks. Their approach is called Sensible Fees, and only rewards incentive compensation to managers based on risk-adjusted performance.

FINSUM: We think the fee disruption going on in the industry is leading to some healthy innovation amongst fund managers. These new funds seem like they will only grow in popularity, especially as fiduciary advisors get more popular.

(New York)

BlackRock just reported earnings and the results are not what many expected. Total inflows for the quarter were just $10.6 bn, the lowest since 2016. Interestingly, one of the biggest areas of losses was in passive strategies held by institutional managers, where BlackRock saw $30 bn of withdrawals. The poor results sent BlackRock’s stock to its lowest point since May 2017. BlackRock’s CEO Larry Fink blamed the uncertainty about rates and peak earnings as reasons for the outflows.

FINSUM: What is interesting here is that BlackRock is probably in the best position to keep devouring assets, but even it is having trouble.

(New York)

New academic analysis has found part of the full cost of the DOL rule on the financial sector. A group of academics analyzed the market cap movements of the top 30 brokerage and fund providers and found that, in aggregate, the DOL rule cost firms $14 bn of market cap. That figure does not include the money spent to prepare for the rule, just changes in share valuation that directly resulted form the rule. However, the same firms have since benefitted strongly from the so-called Trump Effect.

FINSUM: The DOL rule ended up being an enormous waste of time that in hindsight appears to have been doomed from the beginning. We will say that its lasting effect was to bring consciousness of fiduciary duty to the wider public.

(New York)

One of the big problems in our growing era of algorithmic trading is herd behavior. For instance, when many trading algorithms are all geared to trade on the basis of momentum, then you tend to get a ton of it at the same time. Well, the problem might be set to get worse as UBS is debuting a new product to help active managers with trade selection using AI. UBS is launching an AI-based product which recommends trade ideas to active managers, something being referred to as the Netflix of asset management. In other words, UBS’ AI recommends a trading strategy which it thinks will suit the manager.

FINSUM: So now even active managers are trying to be enticed into using AI-recommended strategies. The problem with this is that many managers will end being recommended the same strategies, leading to more trading in the same direction.

New York)

Fidelity made history this week by introducing the first zero fee funds, which will track very broad self-indexed markets. Fidelity’s move is somewhat of a ploy, and definitely a demonstration of scale, as the company has many ways to profit from a customer once it has them in the door. But don’t be fooled, as fees aren’t everything. In fact, there are significant differences in performance even between index trackers of the same benchmark, like the S&P 500, and the differences between them can add up to a whole lot more than the difference in fees. For instance, Schwab and Vanguard already have broad index trackers at 3 and 6 basis points of fees, so hardly a big difference to zero, especially if their performance is better.

FINSUM: “Zero” definitely changes things, but once you are in the sub-15 bp fee category, performance is going to make a bigger difference than fees.