July 18, 2017

It was only a matter of time before Britain’s £7tn asset management industry came under scrutiny and the Financial Conduct Authority’s 112 page report did not disappoint.  Designed to increase transparency and lower expenses for investors, it lifted the lid on the sector’s cost structure ranging from charges by the investment consultant community to fees levied on trading platforms.

The report did not make easy reading for some of the constituents especially as the regulator has promised to clamp down and “impose more discipline” on overspending. This could translate into a single all-in-fee which includes shining a much brighter light into estimates of transaction costs incurred by a fund when buying and selling securities.

Active managers, which are already under siege, will be particularly impacted and has led to Moody’s analyst, Marina Cremonese warning that consolidation may be on the horizon. This is because compliance and operational expenses will rise at the same time as fees are driven down. Their passive peers are already stealing a march and the direction of travel seems to be only one way.

Figures from Thomson Reuters Lipper reveal that the average annual percentage of active European fund assets under management (AUM) has decreased significantly since 2011 when it captured the lion share of total activity. Today, passive investments comprise 10% of total AUM, up from only 5% in 2004 and 8% in 2014.

Finding those golden nugget ideas to create an edge is not that easy when alternative products such as smart beta are muscling in on the same territory. However, returns can be enhanced for both active and passive fund managers by reducing those weighty transaction expenses. Trading on Aquis Exchange, for example, not only offers a much lower cost of trading but also deeper pools of non-toxic liquidity partly thanks to the introduction of a ban on proprietary aggressive high frequency trading strategies.

Take Swiss-based food industry giant Nestlé, where Aquis has around an 8% share. In mid-June, the exchange offered the best price as well as the most advantageous spreads and quality of liquidity ahead of larger competitors Chi-X, Bats and Turquoise. This will only enhance performance which is why it is worth remembering that every basis point counts. 

by Lynn Strongin Dodds