ETFs a major threat to active managers, warns Schroders

Passive products are the biggest challenge facing the funds industry, according to Schroder Investment Management’s Asia distribution head.

He said the growth of exchange-traded funds (ETFs) and the pricing incentive had emerged as a real threat to active fund managers.

Lieven Debruyne, who is also Schroders’ Hong Kong chief executive, told AsianInvestor: “The biggest challenge is not so much about banks versus non-banks; it is much more around active versus passive."

Debruyne said problems around digital disruption and how this is changing the fund distribution landscape can be seen in the light of business opportunities, but the ETF development has been a challenge to the relevancy of pure active managers.

“We’ve seen the growth of ETF in the Americas, where it has grown to a very large part of the market,” Debruyne said. “The ETF growth rate in Europe has picked up substantially. It is clearly growing at a faster rate.

“In certain segments in institutional investing and private banking, ETF has started to gain a foothold. And as people look at actual returns and fees paid for active funds, clearly ETF has a pricing incentive. The challenge is how we as pure active managers continue to remain relevant in the financial sector.”

According to London-based consultancy ETFGI, ETFs and exchange-traded products have been gathering net new assets 21% faster than in previous years.  Assets in these products were above the $3 trillion mark as of this month.

And recently, research firm Cerulli Associates predicted that distributors in Asia would increasingly have two mutual fund lists with passive at the core of the portfolio. This will come into fruition faster once regulations similar to the UK’s Retail Distribution Review (RDR) are adopted in Asia. These regulations should allow investors to clearly see what fees they are paying for and will revive the age-old debate of active versus passive funds, Cerulli said.

While Debruyne was supportive of the RDR, he said Asia was not ready for a ban on fund sales commissions, which is core to the UK's RDR.

Debruyne said that if the issue was just around fees, active managers just needed to offer value for money. “If we charge an active management fee, we need to deliver the alpha. If we do that, investors won’t have any problem paying for an active management fee,” he noted.

Debruyne said fund distribution in Asia was not broken: “The current model is suitable in the current environment. The regulators have so far chosen to increase transparency on what we disclose rather than change the way we charge for funds. I don’t think we need to move further from that because the Asian market is not ready. “