over 3 years ago • 3 mins
The investment management industry has been under pressure in recent years – and while that’s bad news for those companies’ shareholders, it might be good news for you.
For all their airs of mystery, investment management businesses are pretty simple beasts. They come up with a bunch of investment strategies, use them to create a variety of funds that individual and institutional investors can put money into, and try to amass as many “assets under management” (AUM) as they can. They then charge fees on every dollar they look after, which vary depending on the fund. So if you invested $100 in a fund that charged 2% and the value of your investment didn’t change, you’d have $98 left after a year. And because BlackRock manages over $7 trillion, the amount it earns in fees is massive.
“Actively managed” investment funds – where analysts continuously chop and change what’s in the pot – charge higher fees than most passive funds, which just tend to track the value of certain investments and require less intervention. Active fund investors hope that higher performance over time justifies their higher fees, but that hasn’t been the case for years. And that’s led money to flow toward low-fee passive funds instead, which now represent over half of all stock fund investment in the US. That means less income for investment managers, which puts their earnings and share prices under pressure.
Mergers and acquisitions between investment managers help them grow big enough to earn their keep. They allow them to combine their AUM, which means more fee income. And that – coupled with cost cuts like analysts, systems, and technology – should boost profits. That’s why one activist investor thinks Invesco and Janus Henderson ought to merge. Alternatively, the right merger could arm an investment management firm with a new specialism – tax efficiency, say – that clients might be willing to pay for no matter what – just like Morgan Stanley’s latest deal.
This fragmented and competitive world full of investment managers vying for your dollars has driven lots of them to lower their fees, if not abandon them altogether. They’ve done that through low-cost introductory offers, as well as guarantees you’ll only have to pay if you hit a certain profit threshold. That’s good news for you: the money you don’t pay out in fees – with compounding – will eventually add up to something much, much bigger.
Morgan Stanley reckons even investors who do want hands-on money management are less willing to pay for it than they used to be. So investment managers are having to find other ways to convince people to pay up. One of them is “alternative investments” like real estate, hedge funds, and private equity, which stand to offer higher returns than stocks or bonds but generally come with higher fees. Of course, you could always just go it alone: there are a few new platforms designed to help you invest in things like art and property.
The London Stock Exchange (LSE) agreed to sell Borsa Italiana – the Italian stock exchange – to France’s Euronext for $5 billion last week. You might think the sale is a lot to do with Brexit and the big finance firms that are moving cash out of the UK, but it’s not: it’s actually because the LSE wants to win approval from regulators for its $27 billion purchase of market data firm Refinitiv.
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