The news regarding Fidelity that launched the first zero-cost index fund in the US can be considered a bomb for the entire industry. This is the final outcome for the passive investing strategies confirming the evolution of a trend started almost 20 years ago. In fact, according to a research provided by the Investment Company Institute, in 1996 the average expense ratios for long-term mutual funds was 1.04%, 0.84% and 0.95% for US Equity, Bond and Hybrid categories. In 2017, the average cost slipped to 0.59%, 0.48% and 0.70% respectively.

Clearly this trend, where the focal point is characterised by the investors’ strong attention to the pricing policy of the financial houses, is spreading its effects to the active strategies too.Moreover the current environment is still made by a large portion of bond offering low-to-zero yield with a consequent repricing of risk-premia of several asset classes.

As expected a key contributor to this process is to ascribe to the falling expense ratios applied by individual funds, but as shown by ICI researchers, at least other causes count together for 3/4 of the average expense ratio reduction. The mutual funds have seen their asset under management constantly increasing and this could have shifted to lower-cost funds. Last but not least the combination of a survival process where new, lower-cost funds may have entered the market and higher-cost funds may have left the market.

Main competitors of Fidelity, during the announcement day, negatively reflected the news. Franklin Resources drop 5.5 per cent, Invesco declined 4.3 per cent and BlackRock dipped 4.6 per cent. It is a good news for investors that are benefiting from this price war and at the same time is another signal that the industry has to concentrate more and more in the future. Small player will have less chances to survive in this competitive environment. De-facto large Investment groups offering Index Solutions can offset this reduction in revenues by paying for financial professionals out of pocket or by enhancing their profits by lending out the shares they own to short-sellers players. Again a strategy that could be considered only when applied on large scale.

This view about the financial industry is not totally bearish. It only indicates that we are in front of a big concentration process. In addition, the higher level of legal and compliance requirement on top of it goes in the same direction. Hence, if I should make the exercise to imagine what about in next 10/20 years, I can imagine a continuation of this evolution. An industry delineated as a composition of few large players and even less small boutiques where competition and quality would be crucial.

 Christian Zorico: LinkedIn Profile

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Ha conseguito il Master of Quantitative Finance and Risk Management (MAFINRISK) presso l’Università Bocconi nel 2005 dopo essersi laureato in Economia degli Intermediari Finanziari presso la stessa Università. Inizialmente ha svolto attività di ricerca e tutoring per i corsi di Portfolio management e Applied Econometrics presso l’Università Bocconi tenuti dal Professor Andrea Beltratti. In seguito ha avuto modo di consolidare le nozioni tecniche ed applicarle sul campo durante l’esperienza come quantitative analyst e risk manager in un Hedge Fund con strategia macro e successivamente ricoprendo la posizione di gestore di portafoglio e fund manager con mandato flessibile per una banca privata svizzera e un gestore di fondi. L’area di interesse è da sempre il mondo fixed-income e azionario, inseriti nel più ampio approccio di analisi top-down.


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