Lower-Cost Products Grab Marketshare in Mutual Funds
May 3, 2021 — Boston
Lower-cost share classes and strategies continue to drive fee compression
The main drivers of fee compression—lower-cost share classes, demand for lower-cost strategies, and asset manager fee cuts—are likely to remain prevalent forces in the marketplace, according to Cerulli’s latest U.S. Asset and Wealth Management Edition.
According to the research, a shift in share class preference and assets moving into lower-cost investment strategies are the biggest factors driving fee compression. Institutional and R6-shares have seen their marketshare rise from 43.0% in 2015 to 53.8% as of 2Q 2020. Additionally, Cerulli research finds that the top-10 active managers in terms of marketshare saw their collective marketshare climb 7.3 percentage points from 2015–2Q 2020. The shift in marketshare correlates not only with positive net flows, but also with lower-cost products. The asset-weighted average management fee of the top-10 marketshare gatherers is just less than 31 basis points (bps), while the bottom-10 is 52.6 bps, and all other managers is 57.6 bps. “The largest marketshare winners, which have gathered the most net flows, all have low-cost products at least relative to their other active peers,” says Brendan Powers, associate director.
Fee cuts have been another driver of fee compression in mutual funds, especially as asset managers look to trim management fees either temporarily through expense waivers/fee limitations or permanently. Based on Cerulli’s 2020 survey data, most managers (73%) prefer to use temporary fee waivers, rather than permanent management fee cuts (32%) to reduce management fees. The temporary waivers can expire, while it is far more challenging to raise management fees if the fund requires it.
“Ultimately, we expect that the many drivers of fee compression will continue, particularly as more investors seek to use lower-cost mutual fund shares and strategies where they can, while managers will continue to trim fees when possible to make strategies more competitive— either among their active peers or the indexers,” adds Powers. Based on historical trends, Cerulli estimates that asset-weighted average management fees had fallen to 45 bps for active strategies by the end of 2020. While these factors are likely to remain for foreseeable future, Powers indicates that managers may be able to offset lower fees with increased scale, market appreciation, or participation in niches where there is insulation from fee compression.
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