More Storms Ahead With Asset Management Industry MiFID II Issues
Rising markets, an improving global economy, increasing assets at the top 1% and a lack of volatility should combine to make the perfect environment for asset managers, but that’s not the case according to a recent presentation from credit rating agency Moody’s.
According to Moody’s even though some favorable tailwinds are helping the global asset management industry, bigger headwinds are holding back growth.
By far the most significant headwind is the changing shape of the global asset management industry. Since 2007, active management has gradually fallen out of favor with investors, who are instead looking for low-cost beta. According to data from Moody's, the number of mutual funds that opened their doors last year hit a decade low of 439. Meanwhile, the number of funds that either merged with peers or shut their doors rose to 426, the highest level since 2008 (508 funds consolidated or closed in 2008).
The challenges facing the US mutual fund industry have been well documented. Greater fee sensitivity and an oversupply of products with a low-active share (closet indexing) are the reasons most commonly cited as being investors' shift away. Moody's also points to the broader uptake of "wrapper" products, which are being used in favor of mutual funds. ETFs, separate accounts, and collective trusts are all gaining market share at the expense of mutual funds.
Asset management industry MiFID issues are growing
The introduction of the European Union's MiFID II will likely only increase the headwinds against mutual funds. MiFID II is designed to help improve transparency in fees will push investors towards low-cost funds such as ETFs, which will likely lead to further consolidation in the sector.
Interesting, within Europe ETFs, are still a relatively unused product. According to Moody's figures, for the last three years, flows into ETFs have been less than €100 billion per annum, while mutual fund flows are on track to be more than €700 billion this year alone. MiFID II will undoubtedly have a tremendous impact on this market.
The one edge active managers have always had over passive products is that they've been able to offer value through active management in different environments. But it now seems as if ETFs are rising to this challenge as well. According to data from Moody's and consultancy McKinsey, passive management has become an active discipline as providers are increasingly blending active products into ETFs for cost and efficiency. Passive products are assuming dynamic attributes in design and implementation, i.e., smart beta. These active slants may be behind the increasing trend whereby managers are incorporating ETFs into traditional and multi-asset portfolios to build flexible, liquid, cost-efficient solutions to investment puzzles.
As well as the threat from passive mandates, active managers, and mutual funds also face a risk from private equity managers, which are taking even more business. Pools of dry powder are at record levels - $934 billion at September 2017, up almost $100 billion for the year to date. Also, an improving global economic outlook and low rates are allowing private equity houses to grow as others struggle.
The final major factor impacting the industry is the shift away from high-cost human managers to robo managers. These products are cheaper for clients as well as managers, but they're reasonably commoditized products with slim profit margins. Customers are demanding these products, and the industry is shifting to meet the demand, but profit margins are suffering as a result.