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Lower-cost products grab market share
Shift in share class preference and strategies driving fee compression in mutual funds
3 May 2021 | The Asset

A shift in share-class preference and assets moving into lower-cost investment strategies are the biggest factors driving fee compression in mutual funds. Institutional and R6 shares have seen their market share rise from 43.0% in 2015 to 53.8% as of second quarter 2020, according to the latest edition of Cerulli Associates’ US Asset and Wealth Management.

Research also finds that the top-10 active managers saw their collective market share climb 7.3 percentage points from 2015 to the second quarter of 2020.  The shift in market share correlates not only with positive net flows, but also with lower-cost products. The asset-weighted average management fee of the top-10 market-share gatherers is just less than 31bp, while it is 52.6bp for the bottom-10, and 57.6bp for all other managers.

“The largest market-share winners, which have gathered the most net flows, all have low-cost products at least relative to their other active peers,” says Brendan Powers, associate director at Cerulli.

Fee cuts have been another driver of fee compression in mutual funds, especially as asset managers look to trim management fees either temporarily through expense waivers and fee limitations, or permanently.

Based on Cerulli’s 2020 survey data, most managers (73%) prefer to use temporary fee waivers, rather than permanent management fee cuts (32%), to reduce management fees. The temporary waivers can expire, while it is far more challenging to raise management fees if the fund requires it.

“Ultimately, we expect that the many drivers of fee compression will continue, particularly as more investors seek to use lower-cost mutual fund shares and strategies where they can, while managers will continue to trim fees when possible to make strategies more competitive – either among their active peers or the indexers,” Powers adds.

Based on historical trends, Cerulli estimates that asset-weighted average management fees had fallen to 45bp for active strategies by the end of 2020. While these factors are likely to remain in the foreseeable future, Powers indicates that managers may be able to offset lower fees with increased scale, market appreciation, or participation in niches where there is insulation from fee compression.