Asset managers lower fees to lure more new buyers
They call it “pricing for the future.”
That’s the lingo executives at BlackRock, the world’s largest asset manager, use to describe their strategy for exchange-traded funds (ETFs): slashing management fees on basic products and attracting a wave of new buyers to offset the revenue lost on each individual sale.
But while scale can compensate for lower fees, much of the real cash BlackRock is seeking lies in getting the investors in these simple, cheap funds to eventually turn to something more complex – and expensive.
“Clients get comfortable using the lower cost products, they feel that they’ve gotten good value from us and then they look at our other products,” Mark Wiedman, global head of BlackRock’s iShares business, said.
“It’s synergistic in bringing more and more clients to use more and more products.” So far it’s working. While revenue from BlackRock’s plain-vanilla funds, which charge as little as US$3 on every $10,000, is growing faster than any other part of the ETF business, revenue from the firm’s more expensive products is also accelerating, according to Mr Wiedman. That helped the moneymanager exceedanalysts’ revenue estimates for the first time in four quarters during the three months ended September.
A fee war of epic proportions is roiling ETFs. State Street this week cut the expense ratio on 15 ETFs, following similar moves by Charles Schwab and Vanguard as issuers look to gain an edge in the battle for assets.
You can see why: 45 per cent of inflows this year have gone into products that charge less than 10 basis points, according to Bloomberg data.
About $90 billion has gone into BlackRock’s 25-fund low-cost “core” series of ETFs in 2017, just over 50 per cent of the company’s overall inflows, data compiled by Bloomberg show.
New assets have helped recoup 100 per cent of the revenue surrendered when the company lowered fees a year ago, chairman and chief executive Laurence Fink said last week. That’s “way faster” than expected, according to Mr Wiedman, who said the company had planned for this to take several years.
BlackRock is now testing its low-fee strategy on one of its more specialized ETFs, MBB, which holds mortgage-backed bonds. The intended beneficiaries are different, in this case the cuts target money managers fed up with wrangling a portfolio of home loans.
But BlackRock again hopes that scale will balance out lower fees. The fund has gained more than $1bn since the expense ratio dropped to 9 basis points in July, down from 27 basis points.