The credit ratings agency in a recent report cited worries over global regulatory initiatives that may increase operational costs. Other concerns include the acceleration of flows into low-fee passive products from actively-managed funds; high asset valuations; and global macro divergences.
Although the report was for global asset management, Moody’s focused on key events in the US and Europe that will have impact.
New regulations include the US Department of Labor’s new fiduciary standard (enforced in April 2017), which promotes fee transparency while reducing conflicts of interest by ensuring advice is in the client’s best interest, thereby rooting out excessive fees, according to the report. In Europe, the Markets in Financial Instruments Directive (Mifid II) seeks to increase investor protection via regulatory oversight.
Due for implementation in January 2018, Mifid II is a huge concern for around three-quarters of global asset managers surveyed by State Street, who think regulators need to provide better guidance and tools to navigate the increasingly complex landscape, Expert Investor’s sister publication, International Adviser, reported earlier.
In the UK, the Financial Conduct Authority has also suggested an “all-in” single-fee approach to fund charges after criticising the weak price competition among asset managers, attacking actively-managed funds for failing to outperform their benchmark once fees have been taken into account, according to a separate IA report.
There are additional regulations on the horizon. For example, the US Securities and Exchange Commission and the Financial Stability Board are proposing new rules to increase product oversight to reduce systemic risks, which would increase operational and compliance costs, according to the Moody’s report.
Scepticism in actively managed funds
Another concern in the global mutual fund market is the flow of capital out of active and into passive products.
“Active management performance after fees continues to underwhelm,” Neal Epstein, vice president and senior credit officer at Moody’s, said in a statement. “Investors are remaining cost-conscious as scepticism of active management’s value proposition increases.”
In the US, for example, mutual fund flows into actively-managed funds have fallen from nearly $800bn in 2014 to about $400bn of inflows in 2015, while ETF issuances increased from around $1.3trn to $1.5trn, according to the Moody’s report.
The rotation into passively-managed funds have made active managers more dependent on market appreciation to drive AUM growth, while organic growth for passive managers outpaces asset growth in the industry as a whole.
Moody’s said in the report that it would change its global outlook to stable if it sees improved active performance, moderation of rotation into passive products, stabilisation of fee compression and cost structure adaptation.