The first half of 2019 marked a tiny shift in fund investment trends, with investors showing some willingness to try complex strategies.
For years, dollars have flowed to the cheapest, broadest and simplest household-name passive funds such as the iShares Core S&P 500 ETF (IVV). The trend rewarded low-cost providers that operate at enormous scale—mainly, BlackRock’s iShares Core suite, and Vanguard—and has threatened traditional active managers.
Active Competing With Zero
As investors streamlined their portfolios, fees trended toward zero, prompting many to ask if asset management would remain a viable business.
2019 seems to be going the same way so far, but with a twist. Active management is still losing assets to passives and fees continue to trend downward, but investors' preferences have become less monolithic.
Flows year-to-date have favored factors, ESG [environment, social and governance], and cash management funds. These complex funds charge marginally higher fees compared to their simple vanilla counterparts.
Pricing power has come under pressure as the fee wars have followed the flows. Asset managers that had pinned their hopes on upselling complexity are now caught in the fee wars they had hoped to avoid.
Paying More For Complexity … For Now
Between 2016 and 2018, fund inflows favored broad-based, cap-weighted equity ETFs with exposure to the S&P 500, developed markets and emerging markets. But in the first half of 2019, the list of the top five ETFs by flows changed. A low volatility fund displaced one of the S&P 500 funds and an intermediate-term bond fund replaced one of the developed market equity funds.
Top 5 ETFs In 1H 2019 (By Flows)
Renewed interest in bond funds is not surprising given the dramatic interest rate decrease we saw in the first six months of 2019. The breakthrough for USMV is an event. As shown in the flows chart below, after years of stability, USMV’s asset level turned upward starting in Q4 2018 and accelerated in 2019.
For a larger view, please click on the image above.
USMV’s fees, while low in the absolute sense, are five times higher than its major vanilla competitors and more than seven times higher than the cheapest fund in the U.S. total market segment.