Asset managers offering "innovative", "nimble" and outperforming, capacity-constrained funds will emerge as winners during a challenging year ahead in 2017, according to analysts.
Will Riley, manager of the Guinness Global Money Managers fund, said he is favouring groups that are able to respond to these issues quicker: "The winners will be the perceptive, outperforming active managers at the large and small end of the scale.
"For example, at T. Rowe Price and BlackRock, the majority of the funds are outperforming their benchmark and their peers. We expect them to raise assets as a result.
"Additionally, there are the nimble, growing boutiques - with AUM of between £5bn to £20bn - that are successfully generating alpha and substantial shareholder returns. For example, groups like Liontrust, which has expanded distribution and raised assets successfully, and Polar Capital, although they have struggled a bit more of late."
Meanwhile, Keith Baird, financials analyst at Cantor Fitzgerald Europe, said the asset managers that will remain successful will be those with "capacity-constrained funds delivering good performance at the right price", while the losers will be the index huggers charging for "false alpha".
"Fund groups need to rationalise their fund ranges to ensure investors are treated fairly by adjusting charging in line with performance, and shutting moribund funds," Baird said. "They can follow the banks, which are now alerting customers to best value products."
Challenges for passives
Meanwhile, Moody's noted the passives industry has enjoyed huge growth around the world, and the average fund is already triple the size of its active counterpart. ETFs' increased market share in less-penetrated asset classes, like alternatives and fixed income, and the growth of fee-based advisory structures has helped accelerate this rotation.
However, Moody's identified some challenges for the sector including increased competition among passive managers putting further pressure on fees, while a "regulatory spotlight" on ETFs could be possible following the market's tremendous growth.
Recent research from ratings agency and consultancy Square Mile also suggested some investors are paying in excess of 16 times more than they should be for passive investments.
It found 12% of passive assets in the IA UK All Companies sector are invested in just five funds, which carry an ongoing charges figure (OCF) of over 1%. In addition, the most expensive passive fund in the UK All Companies sector carries an OCF of 1.43% compared to 0.06% for the cheapest, thereby highlighting the huge disparity between products.
Moody's also warned about concentration within the sector as investors gravitate towards two or three firms.
However, Guinness' Riley said he is not overly worried about this issue.
"I think there is a landgrab in the passive sector at the expense of profit margins. If there is greater concentration, costs could rise in the future, but it is not a particular concern and you certainly need scale to be successful in
"The bigger players offering the cost efficient beta and trying to provide more innovative products will continue to take market share - like WisdomTree and Invesco PowerShares."
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