You dont have to go far these days to read about the rapid rise of passive investing and the massive outflows from actively managed funds, and the lower fees across the industry these index funds are causing. While this is undoubtedly good news for retail investors, what does it mean for some of Londons largest public fund managers such as Schroders (LSE: SDR) and Jupiter (LSE: JUP)?
While no asset manager is completely free from the relentless rise of index funds, Schroders is better protected than many of its peers. Thats because the company has a well-diversified mix of clients, including institutional (pension funds, sovereign wealth funds, endowments), intermediary (independent financial advisers, banks) and high net worth individuals.
Nine months to September 2016
Assets under management (bn) |
Net flows (bn) |
|
Institutional |
221.9 |
5.4 |
Intermediary |
117.5 |
(2.2) |
Wealth management |
35.6 |
(0.5) |
However, as this table shows, the intermediary category, whose end users are largely retail investors, has seen net outflows as investors spooked by turbulent markets and/or high fees pulled money from the companys actively managed funds. A further worry is that Schroders overall net operating revenue margin decreased from 57 basis points in 2011 to 51 basis points in 2015. This wasdue both to downward pressure on fees and an increasing reliance on institutional clients, who due to their size can negotiate lower fees than retail investors.
How has this affected Schroders bottom line? Pre-tax profits did fall from 438.9m to 436.2m year-on-year in the first nine months of 2016, but this could have been much worse if the company hadnt increased its fee base by drawing in significant institutional funds.
However, the fees asset managers charge clients are unlikely to halt their downward spiral any time soon, so if Schroders is going to thrive in the coming decades it will need to continue diversifying its asset base and moving into new markets such as the US at faster clip than fees fall.
Unfortunately Schroders smaller competitor Jupiter doesnt break out AuM by client type, but it doesnt hide the fact that small investors remain its bread and butter clients. Yet, as we see in the chart below, Jupiter has so far escaped the problems Schroders has with these investors pulling their money from funds.
Annual results through December 31
Assets under management (bn) |
Net flows (bn) |
|
Mutual funds (retail & institutional) |
35.2 |
.86 |
Segregated mandates (institutional) |
4.2 |
.22 |
Investment trusts |
1.1 |
(.02) |
This dependence on retail investors is something of a double-edged sword for Jupiter. On one hand they offer quite high margins, with overall net management fees averaging 87.6 basis points in the first half of 2016. This figure will reduce in the coming years as Jupiter shifts towards lower fee products such as bond funds and targets more institutional clients, but its still quite impressive.
On the other hand, theres always the risk that Jupiters expensive funds will one day lose their lustre forretail investors. This has already happened to many other fund managers, particularly in the US, and if it happens to Jupiter, expect fees to come down in a bid to retain customers. Well run and profitable asset managers such as Jupiter and Schroders arent likely to go the way of the dodo soon, but that doesnt mean passive investing and lower fees wont take their toll eventually.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.