Passively-managed funds could see their fees drop all the way to zero if asset managers employ them as a loss leader to attract assets under management, says a new S&P report.
The report points out that over the past decade 95 per cent of new flows went into the lowest-cost quintile of funds and that passive funds accounted for 19 per cent of global assets under management in 2015, compared to 11 per cent in 2009.
It also notes that passive indexing is a scale business.
Increasing competition means fees can only go one way, the report finds, and as traditional cap-weighted index funds covering the same market are reaping the same returns, fund managers will be left competing only on price.
The report says asset managers could offer pure passive ranges for free in order to retain scale benefits and instead make their margins on smart-beta and active products as well as multi-asset solutions.
It pointed out that exchange traded funds can make significant revenues from securities lending.
Over a five-year period to 2014, actively managed funds in Europe dropped charges by 5 per cent compared to a 42 per cent drop in passive products.
Angana Jacobs, associate director, global research and development at S&P Dow Jones Indices, says: “Active managers have found themselves in the dock time and again recently, with repeated question marks over their value. Many investors are now doubting whether active strategies and the associated costs can realistically give them a chance of outperformance anymore.
“The fee issue, especially in the current low return world, is critical to competitiveness in the market. Consumers care about fees, they care about costs which eat into their returns, and this comes through in the fund flow data, which shows increasing passive allocations.”