The shift to passive versus active management is changing the way we think about investing. That much is clear.
In fact, the shift to passive versus active by definition means we aren’t “thinking” about investing at all. This is a “set it and forget it” atmosphere and to be sure, it makes a lot of sense in a market where stocks and bonds only go up. After all, why pay hefty management fees when you can blow the roof off mimicking a benchmark for 10bps?
This dynamic has of course imperiled the “2 and 20” model as “star” fund managers invariably look the silliest of all (the more you charge the worse you’re going to look when SPY ends up being the best investment choice).
But it’s not just the hedgies that are squarely in the line of fire. Consider the following interesting bit from FT who notes that “2016 was the first year outside of a bear market when the number of mutual funds declined.”
Up to a quarter of all investment funds could be sub-scale and should be considered for closure, according to an assessment that will fuel debate on the future shape of the fund management industry.
The suggestion, in a study by the consulting firm Oliver Wyman and the investment bank Morgan Stanley, comes as fund managers are stepping up efforts to prune their product offering.
An investor shift away from high-fee actively-managed funds, rising regulatory costs and a product cull by fund distributors have soured the economics of running a small fund, executives say.
The Oliver Wyman/Morgan Stanley research says that, at some asset managers, as many as half of their funds may not be sustainable, because they contain less than $50m in assets and are vulnerable to outflows. European managers may need to make the most drastic cuts, since US firms have already begun to slim down their line-ups, it said.
Christian Edelmann, head of Oliver Wyman’s wealth and asset management practice, said that funds with a poor record or whose investment style has fallen out of favour are much less likely to get a second chance.
“Managers should not hope for a ‘cyclical return to flavour’ for a fund,” Mr Edelmann said. “For distributors, it is easier to manage a platform with fewer products, and that is driving platforms to reduce the number of funds they offer.”
In the US, 2016 was the first year outside of a bear market when the number of mutual funds declined, and it is not clear that the current year will mark a return to expansion. So far, 81 new mutual funds have been created, according to Morningstar, while 76 have been shut down or merged.