Asset Managers Are in BIG Trouble. Here's Why.

Summary

The asset management industry is shifting as investors increasingly favor low-cost, passive investment strategies. Firms like Vanguard, with its ultra-low fee ETFs, are leading the way, while traditional active managers such as T. Rowe Price and Franklin Templeton face challenges due to high fees and declining performance. As more money flows into passive funds, active managers are under pressure to adapt, with many seeing significant outflows. The future of asset management will likely be dominated by low-cost, scalable passive products, making it difficult for high-fee active managers to remain competitive.

Takeaways

• 😀 Fees are the single biggest predictor of a fund's performance, and investors are increasingly questioning the value of paying high fees for active management.
• 😀 Active management, which involves attempting to beat a benchmark like the S&P 500, is increasingly under pressure, while passive management—focused on matching the benchmark minus fees—continues to grow in popularity.
• 😀 Vanguard, known for its low-cost products, is a leader in passive investing, with the Vanguard Total Stock Market ETF offering exposure for as low as 3 basis points.
• 😀 Asset managers like T. Rowe Price and Franklin Templeton, which traditionally rely on actively managed funds, are facing significant outflows as investors shift towards passive investments.
• 😀 BlackRock, the largest asset manager, is thriving due to its focus on low-cost passive products, with institutional investors more focused on assets under management (AUM) rather than fees.
• 😀 Investors are increasingly questioning the value of active management, given that 95% of active managers fail to outperform their benchmark over the long term.
• 😀 T. Rowe Price is experiencing large net outflows, with a significant portion of their AUM coming from high-fee retirement accounts, but they're making progress in stemming those outflows with a focus on ETFs.
• 😀 Franklin Templeton is facing similar challenges as T. Rowe Price, with large outflows and difficulties stemming from regulatory issues with Western Asset Management, adding to the pressure on their business model.
• 😀 The shift towards passive investing is putting pressure on firms like T. Rowe Price and Franklin Templeton, which need to find ways to adapt to the growing demand for lower-fee, passive options.
• 😀 The future of asset management looks likely to continue favoring passive investment strategies, with active management losing ground, especially in retirement accounts, where fees are often overlooked by investors.

Q & A

What is the single biggest predictor of a fund's performance according to Morning Star?

The single biggest predictor of a fund's performance is how low the fees are.

Why are asset managers like T. Rowe Price and Franklin Templeton under pressure?

They are under pressure due to the growing trend of passive investing and the competition from low-fee providers like BlackRock and Vanguard.

What is the main difference between passive and active management?

Active management attempts to beat a benchmark, such as the S&P 500, while passive management simply tracks the performance of the S&P 500 minus fees.

What are the typical expense ratios for active and passive funds?

A reasonable expense ratio for an actively managed portfolio is about 50 to 75 basis points, while passive funds usually have an expense ratio of around 12 basis points.

Why is Vanguard's Total Stock Market ETF notable in terms of fees?

Vanguard's Total Stock Market ETF is notable for its extremely low fee of just three basis points, which is considered an incredible value.

How does BlackRock manage its assets under management (AUM) differently from others?

BlackRock has a significant focus on passive funds, with 31% of its AUM in indexing, yet those funds account for just 8% of its fees, while active management makes up 43% of its fees but only 25% of AUM.

What is the state of net flows at T. Rowe Price as of Q1 and Q2 of 2024?

T. Rowe Price faced significant outflows, with $8 billion in Q1 and $3.7 billion in Q2, although its AUM increased due to market gains.

Why is passive management becoming more dominant in the asset management industry?

Passive management is growing due to its lower fees and the increasing difficulty for active managers to consistently beat benchmarks, with 95% of them failing to do so in the long term.

How is Franklin Templeton responding to the decline in active management?

Franklin Templeton is shifting its focus towards private investing and attempting to grow its business through acquisitions, such as the purchase of Legg Mason.

What challenges is Franklin Templeton currently facing?

Franklin Templeton is dealing with large outflows, especially from its Western Asset Management subsidiary, as well as ongoing compliance issues with the SEC.