In an industry used to seeing steady inflows of customers, it must come as something of a shock to discover that $340.1 billion of client money walked out of the doors in 2016. But this is precisely what happened to actively managed US funds in 2016. If that wasn’t bad enough, 2015 had previously seen £230.5 billion leave actively managed US funds, so you might think might think there was a pattern emerging as the chart below shows.

These seismic shifts are having an extraordinary effect on individual company’s fortunes. For example, Franklin Templeton, who only actively manage funds, lost $42.5 billion in 2016whilst Vanguard gained $256 billion dollars over the same period. Dimensional Fund Advisors incidentally also gained $21.4 billion.

Lest you think that this doesn’t apply on this side of the pond, 2016 saw all active equity fund sectors losing market share to passive and index fund investing managers.

So, what is happening? In part the low interest rate environment of the last nine years has, as Warren Buffett once said when referring to falling markets, exposed “who’s been swimming naked”. With low interest rates, it has meant lower nominal returns and an inability to beat the benchmarks by active managers. Whilst these zero or low nominal returns meet the more expensive fund management costs from active managers, the net result is poor returns for investors, hence the exodus. At least, this appears to be the case in the US where investors generally seem better informed. In the UK, investors sometimes appear less savvy but fortunately the FCA as regulator in chief has decided to turn their attention to the asset management sector. The conclusion in their 208 page Asset Management Market Study is that with average active management fees six times more expensive than passive fees (average active equity management fees are 0.90% compared with average passive management fees at 0.15%), and with little or no evidence of price competition amongst asset managers, the FCA is unlikely to sit on his hands for long.

But what should you do? Well let’s think about that for a moment. You have a choice you pay for one year’s active management and get nothing more than benchmark returns less fees or you can get six years of passive investment management and get benchmark returns less substantially lower fees. It’s not rocket science, although form any advisers and their clients this revolution has yet to start. So if you know anyone who might benefit from our second opinion service, your recommendation might prove timely in helping them. If, however, you are already clients of Citywide Financial Partners or use an institutional asset class investment strategy, then you can sit back safe in the knowledge that you have benefited from the quiet investment revolution since 2004.

Sources:

• Morningstar Manager Research 11 January 2017 – Morningstar Direct Asset Flows Commentary: United States
• Financial Conduct Authority Market Study MS15/2.2 November 2016 – Asset Management Market Study -Interim Report

Investments involve risks. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. The information in this material is provided for background information only.  It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.