I think one of the key outcomes of the financial crisis is that banks are being forced to take a root-and-branch look at how they operate, and some things that were unthinkable a year ago are now very much on the table. Passive or active, low- or high-fee, quantitative or old-fashioned stock-picking, formulaic or subjective—nothing is sacred anymore and everything is being thrown into the mix.
Just think of some of the stories we’ve been reporting.
We have hedge funds and ETFs crossing over into each others’ territory, both in Europe and in the US.
There are former hedge fund managers launching ETF-focused funds, and other multi-asset vehicles using ETFs as the building blocks.
Investment management fees are clearly under pressure, and for a lot of firms, having at least a foothold in the growing tracker sector is now a necessity. Could we even see a more fundamental shift towards flat fees for fund management, as Merryn Somerset Webb has suggested in Money Week?
I don’t see why not, particularly if the European fund business moves more towards a US model of fee-based remuneration for asset advisers and ultra-low-cost, large-scale funds run by big houses.
There are huge economies of scale for investment firms who can amalgamate portfolios in this way, and plenty of scope for them to earn additional fees through securities lending and other asset financing operations. As we’ve seen in the bidding war for BGI, this latter business is possibly as valuable as the headline funds operation.
At the same time, there will almost certainly be a rearguard action by some firms to try and create more complex ETF-based structures, akin to the retail structured products that have always earned fat fees for their manufacturers and distributors.
Meanwhile, there are surely substantial opportunities out there for those putting together indices in new and interesting ways. Often, it feels to me that the debate on how to construct the best passive, low-cost portfolio is only just starting, and that many investors will eventually move away from the traditional, cap-weighted benchmarks.
So, the likely BlackRock/BGI merger is very much a sign of the times, as it means a marriage between two firms that were previously seen at very different ends of the fund management spectrum. Elsewhere in the industry, traditional business models are under huge pressure, and the overall finance sector will surely continue to shrink. But there are surely massive opportunities out there for the firms that catch the new trends and exploit the demand for lower-cost fund products.