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Sober Outlook on Industry Shift from Active to Passive; Small Funds Pinched; BlackRock Gets Ahead with Overhaul of Active Equities Division

Recent research findings from Oliver Wyman and Morgan Stanley delivered a sober outlook on the asset management industry, observing that sustained fee pressure is contributing to decreased revenues, a need for cost reductions and a move toward more mergers and acquisitions. The Financial Times also reported that smaller funds with less than $50 million in assets will be particularly squeezed in the current environment and that funds with a poor performance record or with an unpopular investment style face a higher likelihood for closure. The Financial Times report, citing executives, said that the industry’s shift toward passively managed funds, rising regulatory costs and distributors’ efforts to reduce the products offered on their platforms have “soured the economics of running a small fund.” Other industry watchers have observed that funds with less than $1 billion in assets have a lower likelihood of obtaining Morningstar coverage, further lowering their prospects for success.

Another research report by DST kasina recognized similar industry themes, highlighting the rise of digital advice providers and the increasing consolidation among distributors as they respond to regulation. “[M]any distributors anticipate significantly reducing the number of fund options on their platforms. This reduction will not only eliminate platform access and asset growth for many funds, but could potentially exclude entire fund families,” the DST kasina paper noted.  The paper also discussed the trend toward digital advice and the opportunities for strategic partnerships among asset managers and consumer-oriented technology firms.

BlackRock recently announced an overhaul of its equities investment division “for the future of active management.” The move will result in lower-cost funds for investors but will bring job cuts as BlackRock increases its reliance on computer models and data for stock picking. The Wall Street Journal reported that seven portfolio managers are expected to leave the firm as a result of the overhaul.