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Cut-throat price competition among tracker fund providers is fuelling the war on fees across Europe’s investment industry with active managers joining their passive counterparts in axing fees to attract new investors and retain existing clients.
Fees for exchange traded funds have fallen by 30 per cent over the past three years while index-tracking mutual fund fees have dropped by about 35 per cent, according to Fitz Partners, a London-based consultancy.
Traditional active fund managers have responded with offers of “early bird” discounts to attract investors to new fund launches and introducing more “sliding scale” arrangements where fees are reduced when a client’s assets pass a certain minimum.
“Getting fund pricing right is vital. More managers are innovating with a variety of tools to make their fund pricing more attractive to investors. The introduction of value-for-money reports has also increased the focus on fees,” said Hugues Gillibert, Fitz Partners' chief executive. He was referring to assessments that fund managers have been required to produce since the start of this year by the Financial Conduct Authority in the UK.
A third of fund managers based in Luxembourg and Ireland now offer ‘early-bird’ share classes with management fee discounts averaging 47 per cent. Fewer UK-based managers, just 14 per cent, have started to offer such schemes.
“The reduced fees are often material and very welcome provided they continue indefinitely,” said Peter Sleep, a senior portfolio manager at 7IM, a wealth manager. “It is difficult to get money into a new fund as it does not have a long track record. This is made harder by the refusal of many fund buyers to look at anything with less than £100m in assets,” he added.
The number of fund share classes providing fee discounts on a “sliding scale” has increased by about 60 per cent over the past three years but just 14 managers, including Schroders, M&G and AB, have introduced these arrangements.
Mr Gillibert said he expected the intense competition on fees to drive more fund companies to re-examine their spending on custody, legal, audit and administrative services to achieve savings, because it was proving difficult to reduce the costs associated with core investment management functions.
“Investment teams can walk if they see their budget getting reduced,” said Mr Gillibert.
Fee cuts are planned over the next 12 months by 52 per cent of fund managers, according to a survey of 50 senior investment industry executives overseeing $18tn in assets, published last week by Brown Brothers Harriman.
“The fee war is escalating,” said Chris Remondi, global head of relationship management and capital markets at BBH.
The BBH survey also highlighted the pressure from fee competition on other cost centres. With staff across many investment companies still working from home because of the coronavirus pandemic, half of the asset managers surveyed by BBH said they wanted to reduce spending on real estate. Almost a third planned to outsource middle office and data management functions to specialised providers to save costs.
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