In a research note on Janus Henderson Group, Morningstar analyst Greggory Warren said that between the financial crisis and the increased scrutiny of investment management conflicts of interest, the balance of power in the retail channel has shifted toward the fund distributors in the past 10 years.
The analyst said this leads not only to increased fee compression, with investors (put off by the poor relative performance of actively managed funds) increasingly seeking out lower cost in index-based options, but product rationalisation on the major retail distribution platforms, with broker and advisory networks culling funds with poor performance records, high expenses rations and low inclusion rates.
“The recently announced merger of Charles Schwab and TD Ameritrade, two of the largest US discount brokers, will only add to the woes of the US-based asset managers,” Mr Warren said.
Morningstar believes asset managers will be better served in the long run if they can differentiate themselves from the competition by offering cost-competitive funds with repeatable investment strategies, have enough diversification and specialisation in their product mix to cater to a wider array of investors and can prudently adapt their cultures and processes to the more competitive landscape.
“In view of this, we expect the largest passive managers – with Vanguard, BlackRock and Schwab standing out from the pack – and active managers that have scale, established brands, solid long-term performance, and reasonable fees – with Dodge & Cox, American Funds and T. Rowe Price standing out – to face fewer hard decisions about fees and margins, widening the competitive gap in the industry,” Mr Warren said.
Morningstar is confident that the four traits that will lead to long-term growth among asset managers are a level of differentiation in their operations, a stable of cost-competitive funds, repeatable investment processes that generate consistent returns and adaptable business models.