Morningstar - Summer 2019 - 44

Spotlight: Fund Industry

500
-500
EXHIBIT 2

Fee Compression Advisors are moving clients to lower-cost offerings, helping to
1998
2001
2004
2007
2010
push asset-weighted average fees lower.
Asset-Weighted Average Fees by Category for
Actively Managed Funds, 2002-18E

1998

2001

2004

2007

Basis Points
2010
120
Equity: Global/Intl
84

Asset-Weighted Average Fees by Category for
Actively Managed Funds, 2002-18E

Equity: Sector

Basis Points
100

Active Funds
Equity: Global/Intl

69
84

Allocation
Equity: Sector

69
83

Equity: U.S.
Active Funds

120

80
100

67
69

Bond: Tax-Free
Allocation

54
69

60
80

Bond: Taxable U.S.
Equity: U.S.

47
67

Money Markets
Bond: Tax-Free

16
54

40
60

Passive Funds
Bond: Taxable U.S.

14
47

Money Markets

20
40

2002

2006

2010

Passive Funds

2014

Source: Morningstar. Data (and Estimates) as of 12/31/2018.

Total Contributions

Net Contributions

Assets

EXHIBIT 3

Gravy2006
Train Net contributions
to defined-contribution
2010
2014
2018E plans recently
turned negative as the baby boomer generation heads to retirement.

A Slowing
2002

Total Contributions

2018E 14

$400B0

200
Assets

Net Contributions

$400B

1994

1998

2002

2006

2010

2014

0
-100
200

0
-100
1994

1998

2002

2006

2010

Sources: Investment Company Institute, U.S. Federal Reserve Board, and U.S. Department of Labor.

Morningstar Summer 2019

2014

0
-1,000
with a fair amount of price rigidity, despite the
2013
industry being highly2016
fragmented. What fee
compression we have seen over the years has
-500
been more a function of scale, as funds
with larger asset bases spread their costs more
-1,000
efficiently over their shares.
2013
2016
In the institutional channel, consultants long
ago put fees and performance under the
microscope, forcing active managers to clearly
articulate their investment philosophy and
process in order to justify their fees. With more
retail-advised accounts moving to fee-based
account structures, however, which tend
to favor lower-cost offerings, we've seen
the gatekeepers in the channel placing greater
scrutiny on fees and performance.

Broker/dealer and advisor networks also took a
much harder look at the number and scale
of fund offerings on their platforms, as they looked
to eliminate funds with smaller balances,
especially those that have been underperforming,
which would have become more difficult to
justify in a world where a fiduciary standard is the
norm. With this movement of client assets
into lower-cost offerings, and the pressure put
on funds with higher-than-average fees by
the culling of retail-advised platforms, we've
seen substantial fee compression over the past five
years ( EXHIB IT 2 ).
Evolving Retirement Phase of the U.S. Baby
Boomer Generation
Baby boomers, who started to hit their peak
earning years in the mid-1980s, were the first
generation to rely heavily on 401(k) savings plans,
creating a multitrillion-dollar industry.
The consistent flow of contributions into 401(k)
and other defined-contribution plans has
made it an extremely attractive business for the
asset managers that serve this market.
These plans provide a source of positive asset
flows even during poor equity and credit
markets. That said, net flows for 401(k) and other
defined-contribution plans-403(b) plans,
457 plans, the Federal Employees Retirement
System Thrift Savings Plan, Keoghs, and
others-started to go negative during 2013 as
withdrawals from these plans started to exceed
new contributions ( EXHIB IT 3 ).

Morningstar - Summer 2019

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