Trillion-dollar club tightens grip on fund market during crisis

Multi-trillion dollar managers including BlackRock, Vanguard, State Street and Fidelity tightened their stranglehold on the investment industry during the recent market correction, as jittery investors accelerated their migration towards large, low-cost fund groups.

The concentration of assets in the hands of the largest investment managers, a trend that has been gathering pace since the 2008 financial crisis, spiked significantly in the first three months of the year, according to analysis from US-based research group Flowspring.

The largest 1 per cent of investment groups manage 61 per cent of total industry assets. This is 243 times that of the bottom 50 per cent, compared with 208 times at the end of last year and 105 in 2010.

“Investors are reconsidering everything about their portfolios right now, making decisions they’ve put off for years, and many of them are flocking to passive and low-cost providers,” said Warren Miller, chief executive of Flowspring.

Market leaders BlackRock, Vanguard, State Street and Fidelity in recent years have capitalised on their economies of scale to implement ferocious fee cuts. These efforts have attracted new investors.

In 2018, Fidelity Investments pioneered a range of zero-fee index funds, a move that spurred a flood of new investor money. More recently the US group launched a range of thematic active funds whose charges decrease over time if investors do not cash out.

Vanguard slashed fees on nearly half its European fund range last year, while BlackRock and State Street have also reduced charges on their index-tracking funds in an escalating passive investing price war.

Quantitative investment specialist Dimensional, bond giant Pimco and American Funds, the retail arm of Capital Group, also feature among the 27 groups that make up the 1 per cent of asset managers, according to Flowspring. Fidelity’s inclusion in the ranking refers to US-based Fidelity Investments, combined with its international sister companies.

The research company’s calculation is based on a universe of 2,772 managers and includes data for open-ended, closed-ended and exchange traded funds globally.

Mr Miller said that concentration was also accelerating at fund level, with investors channelling more money into large, low-cost, predominantly passive funds. “We’ve seen investors buck the idea that active managers can outperform in a downturn,” he said.

Seven out of the 10 largest global funds, including money market funds, are index trackers, according to Morningstar Direct. Two of the largest, Vanguard’s Total Stock Market index fund and State Street’s S&P 500 ETF Trust, attracted more than $24bn in new money in March.

Industry concentration is set to increase as margin pressures and the desire for scale push more asset managers to take part in M&A. Franklin Templeton is in the process of buying Legg Mason in a deal that will swell its asset base to $1.5tn. Invesco also shot into the trillion-dollar club last year following its mega $5.7bn acquisition of OppenheimerFunds.

Mr Miller warned that the concentration of assets in the hands of fewer decision makers could increase baseline market volatility in future. He added: “It could also make the heads of the largest asset managers incredibly powerful influencers of the global economy as they can exert serious pressure on their portfolio companies.”

Groups are already making their voices heard. This year both BlackRock and State Street wrote to chief executives warning them to take sustainability seriously.

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