An FT report that investors have sold off $30bn of actively managed funds in 2019 illustrates the scale of the industry’s problems. Like many customer-driven developments, it starts with high fees and low returns eroding value proposition. Then, a series of blunders compromises trust, accelerating a trend into a full-blown exodus.
The blunders have been well documented. First, came revelations that H2O Asset Management has been investing in “highly illiquid” bonds. Neil Woodford, an erstwhile star fund manager, has seen his flagship fund suspended. Hargreaves Lansdown has been forced to defend its Multi-Manager funds, days before announcing changes to their Wealth 50 list.
The Economist took the view that some of these developments are an example of “liquidity mismatch”: companies borrow on a long-term horizon, whilst investors demand instant access to their money. To improve performance, some fund managers have taken to investing in more illiquid asset classes, forcing them to “gate” their client’s money when faced with high volumes of withdrawals.
Betraying customers' trust
Gating is awful customer experience. Shutting off investors from their money - when they feel the most vulnerable - is nothing short of a betrayal of the core trust that all professional arrangements depend on. That some fund managers would even contemplate such a move, belies a perception of investors as mere sheep to be fleeced.
The distribution model is not helping either. With the decline of small IFAs in favour of supermarkets, retail investors feel exposed and confused at times of uncertainty. And when the hand-in-glove relationship between fund “producers" and distributors is exposed, trust quickly gives way to suspicion.
Lose trust, lose customers
Given current developments, the exodus from active funds is likely to accelerate. As the image of professionalism that fund managers have cultivated evaporates, ETFs offer not only better value but also look more dependable. This could well benefit Wealth Managers, but active Fund managers are likely to see losses.
The $30bn lost to bad customer experience is no surprise. Lose your customers’ trust, and you will lose their business. It applies to every industry, and Fund management is no exception.