Posted inAnalysis

Zero-fee funds? Be careful what you wish for

Today’s financial pages have understandably latched on to S&P Dow Jones Indices’ Angana Jacob’s suggestions that large asset managers could well use zero-fee passive funds as a “loss leader” to retain their scale.

It’s an alluring argument, one indeed which has been circulating among industry thinkers for some time.

In a world where ‘disruptive’ business models and first-mover advantage are so keenly sought, cutting out fees entirely could conversely be a very profitable move for any firm that can subsequently retain clients through other means.  

However, reading further into Jacob’s report creates more questions as it does answers.

In her talk of the “hollowing out” of active management, one suggestion is that active funds can retain fees by moving toward unconstrained investing or adding derivatives, leverage and shorts to their mandate.

“Divergence and clear positioning away from traditional broad beta mandates is already underway, but traditional active managers and alternatives will converge to some extent in unconstrained mandates or as suppliers of multi-asset solutions,” she says.

The rise of more multi-faceted and sophisticated investments is nothing new; the growth of absolute return is testament to this.

But can all fund groups honestly say they are innovating for the genuine benefit of their clients or, with higher fees, are they simply launching more baffling ‘me too’ products to boost their profits?

Part of the Bonhill Group.