The ‘Napster moment’

CHANGING THE INDUSTRY The rise in passive investing corresponds with a decline in fees across the industry.

because they want to keep the fees down. That is not going away.”

Morningstar’s analysis shows the rise in passive investing has corresponded with a decline in fees across the industry – in active and index funds. Investors are selling high-fee funds, which puts pressure on the entire market.

In the US, even active managers aren’t able to attract inflows unless they’re low cost. Flows into higher fee funds have been negative for the last four years.

“There is incredible pressure on fees for active managers and advisors,” says Garland. “To me this is a little like asset management’s ‘Napster moment’.

“The biggest shift I see globally is the move to passive and the focus on fees.”

The challenge to the industry is, however, also an opportunity. The consensus is we’re moving into a lower-return environment, where markets won’t deliver the same kinds of numbers we’ve seen for 20 or 30 years.

Investing only in index funds may therefore not deliver the inflation-beating returns that investors need. Philip Saunders at Investec Asset Management believes the opportunity will be there for active managers to find ways of delivering that additional performance.

However, this will require active managers to offer products compellingly different.

“We have a more difficult world ahead of us in the next five to 10 years. The old beta cruising style of investing has passed its sell-by date … You really have to be a good active investor.”

“Active is not dead, you just have to be good,” he says. “You have to be able to provide excess return against the benchmark. The only way you can do that is by looking different to the benchmark.”