Active managers under pressure from ETFs, industry funds

Active fund managers are facing continued pressure with new analysis from Morningstar pointing to competition from industry funds and exchange traded funds (ETFs).

According to Morningstar, the trend to low-cost exchange traded funds is likely to persist while industry superannuation funds “will likely grow in scale and challenge traditional active managers”.

However, the research and ratings house has also noted that investors have become overly pessimistic with respect to active managers with the result that they are generally undervalued.

Looking at industry funds, Morningstar said that through default choice and mandatory contributions, industry funds are pressuring fees and could tap into a broad range of investment opportunities, including unlisted options – a byproduct of scale.

The analysis said the shift to ETFs and industry funds from active managers was likely to persist.

“Net outflows since early 2022 are a blow to active managers. Many underperformed passive funds amid the market downturn. While some funds were recently reallocated to active managers, flows are sporadic and concentrated on select asset classes, primarily fixed interest,” it said.

“We think the competitive positions of active managers are weakening. Growth in funds under management is likely to be led by market gains, supported by client flows from other active peers,” Morningstar said.

It said the headwinds being experienced by active managers from fee compression was unlikely to slow with large passive shops using scale to lower prices to attract assets.

It said in these circumstances active managers would likely need to rim pricing to counter passive competition.

“Fee compression is likely to be most acute for mature boutiques Magellan and Platinum, given much higher fees than peers. Conversely, fees for Insignia’s asset management products are likely to compress more slowly as they are largely priced below active fund peers,” the analysis said.

Notwithstanding the challenges facing active managers, Morningstar nominated Insignia Financial and Perpetual as being undervalued.

It said the market had underestimated Insignia’s ability to stabilise earnings, with cost-outs counterbalancing tepid revenue declines.

With respect to Perpetual it said the market was overlooking the firm’s likely earnings recovery from cost cuts and better flows.