Asset managers may earn less as tastes change: study

Americans are developing a fresh taste for mutual funds but firms that manage these accounts, mostly for college and retirement savings, may not get rich off the flood of new cash much longer, a new study has found.
Traditionally, asset management companies like Fidelity Investments earned more if they took in more assets because they make a fee off each dollar invested.
However, the study by management consultancy Capco found that the $9.3 trillion mutual industry's bottom line may be affected in the years ahead by pressure on fees as well as investors' appetite for either low cost products like index funds or costlier high return offerings like hedge funds.
"Fund managers are certainly earning decent returns but the growth in that profitability is threatened by declining fees," the study's author, Edward Hawthorne, a managing principal at New York-based Capco, told Reuters in an interview.
A copy of the report, which is expected to be widely released this week, was obtained by Reuters on May 02. The study focused on mutual fund earnings from 2000 to 2005.
Many publicly traded asset management companies recently delighted investors with news of higher quarterly earnings as demand for their products picked up. And the Investment Company Institute, the mutual fund industry's trade group, confirmed that trend by reporting that Americans sent $93 billion, almost double last year's amount, into stock funds during the first three months of the year.
But Hawthorne's study found that pension funds and even private individuals are now favouring new investment products.
"We are seeing a trend in building portfolios at both ends of the spectrum," Hawthorne said, explaining investors' tastes for cheaper index funds or exchange traded funds or more expensive hedge funds.
Hedge funds, which differ from mutual funds in their ability to use trading techniques like selling stocks short, are not widely sold by traditional mutual fund firms.
The industry is seeing both a move toward funds that charge fees of between 20 and 40 basis points for index funds as well as to hedge funds that often charge a 2 percent management fee plus a 20 percent performance fee.
Actively managed stock funds that charge investors anywhere from 65 to more than 100 basis points in fees will continue to attract investors, Hawthorne forecast. But on a relative basis, the share of overall investors picking these types of offerings in the industry may diminish in the years ahead, the study found.