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How funds management is eating its own lunch
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Ian Knox
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By Ian Knox*
With the globalisation of funds management, helped by technology partners that make global markets accessible at the flick of a switch, we are seeing a really interesting arbitrage in management fees.
For years, international managers have pointed out that Australia is only 2 per cent of world share markets and that we lack real portfolio diversification because of our resourced-based economy stapled to a few financial service stocks. So, we have responded to access markets via indexes, such as ETFs or, selectively, via alpha-adding managers.
Now, an interesting twist is occurring in that the global firms that have differential pricing (code for cheaper) in, say, the US can be accessed via technology here in Australia at US pricing. In other words, the same manager, same portfolio and same returns can be had at a fraction of the cost.
The old adage about a global village is becoming a reality and it might bite our funds management industry and reduce the fee pool if it really gains traction. One imagines the mega-super players, like the industry funds, will sit up and take note of this opportunity because they’ve put pressure on fees for years and all of a sudden the opportunity to drive down investment costs is a reality. In time the planning community will also see this as an opportunity to drive down overall expenses in the value chain as advisers seek to retain the highest margin.
The players that are stirring the pot are primarily the major ETF firms who are reliant on massive scale and indexing algorithms. Blackrock, via iShares, SSGA and Vanguard, for example, are able to offer ETFs in certain markets at a price that beggars belief. In the US, it’s possible to access an ETF at one basis point. Here in Australia we are many multiples above that.
Low cost or even no-cost fees in funds management have been around for years but never mainstream and never public. Twenty years ago firms were offering indexed institutional mandates for one basis point with most of the managers’ margins being made through securities lending. It’s legal, it’s been a safe process to date and, while it’s not every trustee’s preference, there is a market for it.
Now we appear to have the real deal of holding stocks without the lending risks – seems likely it will get noticed. As we also have the fee-sensitive SMSF market with a penchant for DIY investments and commonly via ETFs, I can’t help thinking they will make this new phenomenon a mainstay feature of pricing in the ETF market.
But what happens to the small ETF players or the value-adding alpha ETFs or income stream ETF players? Sounds like the answer is they have to sell the value add just like active managers do on an after-fees basis. And what about the local BDM force trying to promote a local product at local pricing when the market knows how to get international pricing of the very same pool? Perhaps the party is over for them as well and value-based selling will have to be re-learned as well.
One group of managers that shouldn’t be fazed with all this is the real-deal active managers. The choice has never been more blunt: after fee and and ‘no-fee’ offerings will be so clear that the active managers just have to deliver and those that can and do will prosper because fees will be less of an issue. The whole market won’t go indexed (think of the arbitrage for active managers if it did). On the contrary, it will seek out alpha managers more succinctly for their role in portfolios.
Perhaps this unusual set of circumstances will be common across multiple industries in the future and we just have to get used to it. China and the internet have let consumers access online shopping at non-Australian prices and when the A$ allows consumer durables almost felt free anyway.
Perhaps this is not the best analogy but with ‘disruptive’ being the buzz word of 2016 maybe, just maybe, the old majors rather than the new players will be the disruptors in funds management. Who would have seen that one coming?
*Ian Knox is the managing director of Paragem, a HUB24 company. The views expressed are his own. Contributions to this column are welcome. Contact: IKnox@paragem.com.au
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