We said in January in our Platforum Perspectives that fund managers should embrace the squeeze. Our latest investor research reveals that lower average fund management fees may actually spur appetite for actively managed funds. Also, the research noted that high average fund management fees may drive demand for passive funds.
The findings are both counter-intuitive and sunny. As declining fees drive demand for active fund management, the industry’s growing pie may make up for the decline in income on a per account basis. So everyone wins: funds, platforms and investors. System-wide gains are terrific when you can get them. If the industry plays its cards right, it is poised to get them.
In May, Platforum published research with 1,701 investors in seven European countries. It shows that European investors in countries with higher average fund management charges prefer tracker funds and investors in countries with lower average fund management charges prefer active funds.
Strikingly, the survey respondents were presented with a scenario in which they have unexpectedly come into some money, around €20,000, and asked how they would invest it. (Swiss and Swedish investors were presented the lump sum in their local currency equivalents.)
On average across the markets, a hefty 35% of investors would put most or all of the money in active funds and only 10% would put most or all of the money into index tracker funds.
Interestingly, the results varied significantly by market. For example, 56% of Dutch investors would put all of most of the money into actively managed funds compared to only 41% of Spanish investors. By contrast, 17% of German and 16% of Swiss investors would put most of the money into index tracker funds compared to just 5% of Dutch investors.
Intended use of active and index tracker funds for investment scenario, by country
Source: Platforum European Investor Insights, May 2017. N.B. excluding “Don’t know” responses.
Base: Netherlands: 167, Switzerland: 115, Sweden: 150, Germany: 168, Italy: 193, France: 163, Spain: 164
The Dutch RDR introduced greater fee transparency and there has also been quite a bit of press attention about passive versus active fund fees in that market. We were surprised that Dutch investors would show a greater appetite for active funds. But we see similar results for the UK, which has also gone through an RDR.
When presented with a similar scenario, 12% of UK investors would put all of the money into index tracker funds. And, when we asked UK investors their satisfaction levels with existing investments, UK investors were more satisfied with active funds than with index tracker funds.
Next, we wanted to see if there was a relationship between fees charged for fund management and preference for active funds. So we took our survey data on intended use of tracker funds or active management, and plotted this against the average cost of funds (using data from our friends at Morningstar).
The result? A very interesting, wide distribution across the European markets. The quadrant chart, below, depicts the asset‐weighted average net expense ratio in each of the markets compared with the intended use of index tracker funds on the x-axis.
Average fund management fees vs preference for tracker funds
Source: Platforum and Morningstar
Investors in countries with higher fund management charges show a distinct preference for tracker funds. Italy and Germany have among the highest asset-weighted average net expense ratios, at 1.42% and 1.25% respectively — and a larger share of investors in each of these markets would put most or all of the money into tracker funds. By contrast, countries with a lower cost of asset management tend to have a lower preference for passive tracker funds, in particular the Netherlands (0.75%) and France (0.83%).
We ran a separate analysis again to compare fund costs with the intended use of active funds. Investors from countries with lower fund management costs show a preference for active fund management. In the Netherlands, where the asset-weighted average net expense ratio is 0.75%, some 29% of investors say they would invest all of the money under the scenario in active funds.
Of course as every stats geek and big-data lover knows, correlation does not mean causation. We can’t say that lower fees in Holland and the UK are the cause of the preference for active funds. However, we can show that there is an association: in markets with lower average fund costs, the stated appetite for active management is stronger.
Hence Platforum adamantly believes that fund managers should embrace the squeeze. It is not just the right thing to do for customers, but may make good business sense too.