The days of traditional actively managed ‘building block’ funds are quickly waning. Funds offering large-part basic market exposure and a (very) small-part market outperformance for a hefty fee are a remnant of a previous era.
If long-established trends in the U.S. are any indication of what Europe should expect in a post distribution fee environment, then the shift from active ‘building block’ mutual funds to passive funds and ETFs is set to explode.
There is one consistency in the sea of change that is the investment management industry: the big continue to get bigger. Globally, there are now 774 mutual funds with greater than USD five billion in AuM – up from 650 at the end of 2007.
The days of traditional actively managed ‘building block’ products are quickly waning. Products offering large-part market exposure and an often (very) small-part market outperformance for a very hefty fee are a remnant of a previous era. These funds are in the midst of a perfect storm.
Active investment managers have the opportunity to manage money more freely today than anytime in the last twenty-five years. Considering the proclamations of death and disaster for active management at the hands of the ‘passive’ interlopers, this statement may sound misguided if not an outright misstatement of fact.
The middle is a tough place to be for investment managers these days. Once the lifeblood of large shops, narrow ‘core’ products have lost the interest of investors. The titan funds built in the 1990s and 2000s are in net redemption – well below their peak AuM levels. These funds are now part of a legacy book of business associated with a former era. Now the question for these funds is less about growth and more about retention.
Édouard Carmignac: all-time great or one-hit wonder? (co-written with Steven Goldin of Parala Capital)
When it comes to evaluating a fund manager’s skill, performance numbers only give you part of the picture; it is crucial to also focus on the drivers of that track record.
The PIMCO Total Return Fund, the largest mutual fund in history, peaked at $292,875,998,695 in April of 2013. So did its captain, Bill Gross. This may in fact be the most prominent example of the rise and fall of a blockbuster fund in history. It is my assertion that this $293 billion high water mark will not be reached again.
A new era for investment management is emerging. Complexity abounds, but it promises the potential to broaden business opportunities, create more stable revenue dynamics and provide greater client control. To understand where we are headed, we need to understand the ground we have covered.