March 22, 2019

Breakingviews: SEC is last activist that fund investors need

by Breakingviews.

The Securities and Exchange Commission is missing the point on competition. The watchdog worries that consolidation and fee pressure may be hurting small asset managers, thereby reducing choice. For sure, BlackRock and Vanguard loom ever larger over the industry. But the main problem for rival funds is justifying the fees they charge already.

Dalia Blass, who heads the agency’s investment management division, told a mutual fund conference earlier this week that she was concerned small investors could see their range of fund opportunities shrink as technology and scale favor industry behemoths. The agency will examine whether regulatory barriers are holding back smaller players, and whether new technologies like blockchain could broaden their distribution.

It’s no bad thing for the SEC to consider the impact of its own rules. Its requirements on liquidity risk management and reporting, for instance, carry fixed costs that have a bigger impact on small firms. But adding fee pressure and consolidation to its work program is a case of regulatory overreach.

The average expense of a U.S. equity mutual fund has nearly halved since 2003, to 0.55 percent last year, according to the Investment Company Institute, yet the risk of excessive concentration seems a long way off. Nearly 10,000 U.S. mutual funds offered by 840 fund families figure in data from Refinitiv’s Lipper. The real problem is how few active stock pickers deliver value. Nearly 65 percent of U.S. large-cap active mutual funds underperformed the S&P 500 Index last year, according to S&P Dow Jones Indices. That’s partly thanks to fees, and the SEC shouldn’t help these laggards keep their charges up.

BlackRock and Vanguard have grown huge because they enable investors to cheaply put money in a diversified basket of stocks. Yet their collective assets of some $11 trillion represent less than 15 percent of the global industry, which Boston Consulting Group puts at $79 trillion. They’re still cutting fees, too.

That may make it even harder for smaller active managers to deliver the goods. But that kind of competition should be welcomed. If it spurs them to rethink their game – and, say, pursue concentrated portfolios or use technology to offer improved performance to investors – all the better.


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