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October 9, 2017

Monday Morning Memo: Fund Charges Are Seeing a Change

by Detlef Glow.

Over the last few weeks the fund markets have seen two major players in active fund management changing their views about the pricing models of their actively managed funds. Allianz Global Investors (AGI) (for three new funds in the U.S.) and Fidelity (for its equity funds in Europe) announced they are moving the pricing of their actively managed mutual funds from a rather fixed management fee to a performance-based variable fee with a very low minimum fee applied in all circumstances. On the same topic AB (AllianceBernstein) announced earlier this year that it will change the management fees for a limited number of its existing funds to a similar model.

These announcements are quite surprising, since they means a complete change in the way these companies charge their clients for asset management services. But, while AB and AGI have put only parts of their income streams at risk if their funds underperform their benchmarks, Fidelity is all-in here. In turn, this means Fidelity is quite confident that its fund management approach is delivering value compared to an index investment, while AB and AGI seem to want to try out the change first before they start a larger initiative in their product ranges.

These initiatives show that active managers have started to take seriously the developments in the asset management industry; i.e., the move of assets in the direction of cheap passive solutions such as ETFs and index funds, and they are reacting to this threat. Even though not all active asset managers by far are likely to take such a move into consideration, there may be a lot of followers, if these three companies are successful with the new fee structure. In other words, this may mean the high inflows into ETFs (products that were always under cost pressure) will finally lead to a more competitive environment in the active management space.

For me this is a massive change in the global fund industry, since these asset managers are really aligning their interests with the interests of investors. I hope a number of major players will follow because it will show that the fund industry has learned its lesson and is becoming more client-focused. But one thing is clear: to make these moves a success for fund promoters the new fee structures must be clearly formulated and transparently applied to the funds. And transparency might be the next issue to be tackled by active fund managers, since ETFs are bought not only because they are cheap; often they are bought because of their transparency.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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