Active fund managers need not fear declining fees. Platforum investor research reveals that lower average fund management fees may spur appetite for actively managed funds while conversely high average fund management fees may drive demand for passives.
Platforum has just published research with 1,701 investors in seven European countries. Analysis of the findings reveals that European investors in countries with higher average fund management charges prefer tracker funds, and that investors in countries with lower average fund management charges prefer active funds.
We presented investors with a scenario to understand their future investment preference and attitudes to the issue of active versus tracker funds – among other product preferences. Scenarios don’t measure actual behavior but they do indicate preferences.
Survey respondents were presented with a scenario in which they have unexpectedly come into some money, the equivalent of around €20,000, and were then asked questions about how they would invest this amount.
On average across the markets surveyed, 35 per cent of investors said they would put most or all of the money in active funds and 10 per cent would put most or all of the money into index tracker funds.
But we noticed that the results varied significantly by market. For example, 56 per cent of Dutch investors would put all or most of the money into actively managed funds compared with only 41 per cent of Spanish investors who would buy active funds. By contrast, 17 per cent of German and 16 per cent of Swiss investors would put most of the money into index tracker funds compared with only 5 per cent of Dutch investors.
The Dutch RDR introduced greater fee transparency and there has also been quite a bit of press attention regarding passive versus active fund fees in that market.
We were surprised that Dutch investors showed a greater appetite for active funds. But we see similar results for the UK, which has also gone through an RDR. When presented with a similar scenario, 26 per cent of UK investors would put most of the money into actively managed funds. Furthermore, when we asked UK investors about their satisfaction levels with existing investments, UK investors were more satisfied with active funds than with index tracker funds.
We wanted to see if there was any relationship between fees charged for fund management and preference for active funds. We plotted the data from our survey research on intended use of tracker and active funds against the average cost of funds.
The results show that investors in countries with higher fund management charges show a preference for tracker funds. Italy and Germany have among the highest asset-weighted average net expense ratios, at 1.42 per cent and 1.25 per cent respectively, and a larger share of investors in each of these markets would put most or all of the money into tracker funds. By contrast countries with a lower cost of asset management tend to have a lower preference for passive tracker funds, in particular the Netherlands (0.75 per cent) and France (0.83 per cent).
The second analysis looked at the asset-weighted average net expense ratio compared with the intended use of active funds. Investors from countries with lower fund management costs show a preference for active fund management. In the Netherlands, where the asset-weighted average net expense ratio is 0.75 per cent, 29 per cent of investors say they would invest all of the money under the scenario in active funds.
However correlation does not mean causation. We can’t say that lower fees in Holland and the UK are the cause of the preference for active funds. However, we can show that in markets with lower average fund costs, the stated appetite for active management is stronger.
Embracing transparency and lower charges is not just the right thing to do for customers, but it could make good business sense too.
Heather Hopkins is head of Platforum