Jan 29 - Price competition among providers of mutual funds and
exchange-traded funds (ETFs) is likely to put pressure on investment management
fee growth for U.S. trust and custodial banks, according to Fitch Ratings.
Recent moves by Fidelity, Vanguard, Schwab, Blackrock, and other fund managers
to reduce index fund and ETF fees paid by increasingly cost-conscious investors
will make it difficult for trust banks, such as State Street, Northern Trust,
and Bank of New York Mellon, to push through meaningful fee growth on individual
and institutional customer accounts.
While the major U.S. trust banks all reported investment management and
servicing fee growth in 4Q12 as a result of stronger equity markets and some new
business, they have been forced to adjust pricing strategies in ways that may
erode profitability of this core business that touches multiple revenue streams,
particularly if trading volumes and investment inflows remain weak.
This price competition is particularly relevant in the plain vanilla index
space, which serves to replicate investment returns of bellwether indices such
as the S&P 500 and Dow Jones Industrial Average, among others. As a result, some
of the larger asset managers and trust banks are launching more niche ETF and
index products in areas such as commodities and emerging markets.
These newer products have the benefit of capturing the strong demand in the
marketplace for more index-like products, providing clients with exposure to
less developed and higher growth sectors. They also carry higher management fees
than the more traditional products noted above.
Since the financial crisis, net outflows from actively managed funds into index
products and ETFs have made it more difficult for managers of higher cost
products to compete. The growth of ETFs, with low expenses and no restrictions
on trading throughout the day, is posing a threat to actively managed funds in
both the retail and institutional channels.
Furthermore, we think that a race to the bottom in fees for index funds and ETFs
likely signals the growing importance of scale in the asset management business,
with slow fee growth and lower margins discouraging market entry by competitors.
In a more mature industry, with consolidation largely complete, smaller
competitors in the index fund and ETF space will find it increasingly difficult
to challenge incumbents, while future price competition from the existing large
incumbents is likely.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.