High costs, weak performance hurting active fund managers

IN theory, the outlook should be rosy for the fund management industry. Vast swathes of the world are grappling with ageing, creating demand for investment products that stand a chance of earning a return greater than cash rates. Low interest rates and persistently low bond yields nudge savers towards higher risk products, which is surely an opportunity for active fund managers.

Yet over the past few months, the global trend in the industry has been one of consolidation - and analysts believe that this wave will intensify. Deals that have made headlines include the merger of Janus Capital and Henderson; Standard Life and Aberdeen Asset Management; and Amundi's US$4 billion purchase of Pioneer. A number of challenges mar the outlook for active fund management - the unrelenting pressure on fees, the burden of regulation and growing compliance costs, to name just a couple.

But by far the most formidable challenge may well be active funds' perennial underperformance against benchmarks, which is blamed for the flood of monies flowing into passive index funds. The most recent SPIVA scorecard by S&P Dow Jones provides yet more dismal findings. The report helpfully provides longer-term data to even out market cycles. Over a 15-year period to December 2016 for US equity funds, 92 per cent of large-cap managers, 94 per cent of mid-cap and 93 per cent of small-cap managers failed to beat their respective benchmarks. The efficiency of a mature market such as the US is often cited as a reason for funds' underperformance. But the SPIVA data for emerging markets (EM) is as dismal. Over 15 years, 90 per cent of EM funds also failed to beat their benchmarks.