Janus saw the writing on the wall. And it wasn’t pretty.
Like many big asset managers, Janus Capital Group is caught on the wrong side of two powerful trends that are reshaping the financial industry.
The first is the wholesale shift by investors from active management of assets to passive investments. In the last 36 months alone, there has been a $1.5 trillion swing out of active and into passive. That has lifted the market share of passive products, such as Vanguard index funds and exchange-traded funds tied to the S&P 500, to about 30 percent of all retail assets -- up from about 20 percent five years ago.
The second, related trend is that money is moving from high-cost investments to low-cost investments. This is actually the mother of all trends: It’s the dominant force behind many investment changes in the financial industry today, including Janus’s decision to tie up with fellow asset manager Henderson Group.
This “cost migration” to low-fee products really comes to light when you isolate flows by investment vehicle. For example, looking at flows among actively managed mutual funds generally shows outflows from those that cost more than the average active fund fee of 0.69 percent . And in some cases, money is even flowing out of funds that have beaten their benchmarks -- showing that costs can be more important than performance.
For example, the Fidelity Advisor Diversified International Fund (FDVIX) posted a three-year annualized return of 5 percent, handily beating the 3 percent posted by the MSCI EAFE Index. Its reward: $7 billion in outflows.
There are many similar examples of outperforming funds seeing investor withdrawals.
On the flip side, there are two fund families out of the top 20 whose active mutual funds have bucked the trend and taken in cash recently: Vanguard and Dimensional Fund Advisors. What do they have in common? Their average fund fees are 0.20 percent and 0.36 percent, respectively, which is well below the .69 percent average. And some of their funds that took in cash actually underperformed. This is at once good news and bad news for active managers. It shows that investors will still go active, but they want it cheap.
This cost migration can also be found within index funds, which are already dirt-cheap. For example, the top 10 index funds seeing outflows have an average fee of 0.45 percent, while the top 10 seeing inflows -- almost all Vanguard -- have an average fee of 0.10 percent.
Low rent seeking is especially prevalent among ETFs, where the average fee is 0.25 percent, but the 10 ETFs that took in the most money over the last three years have an average fee of just 0.11 percent.