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1) AB to Reorganize One FlexFee Fund and Eliminate Performance Fee for Another

SEC Filings  |  5/6/2021

Because… The restructuring of two FlexFee funds shows the unsuccessful experiment with the performance-based fee concept. The performance-based fee, also called the fulcrum fee, seems like a good idea for some investors because the performance is closely linked to the fund’s expense ratio, but this fee structure may send different messages to the investor community. On the one hand, the alignment of the manager incentive with shareholder interests indicates that portfolio managers are positive about their stock selection skills, which can give investors more confidence in the fund. On the other hand, it may motivate the fund managers to take on more risk. The use of the fulcrum fee instead of a fixed fee may complicate the fee calculation. Any uncertainty in fund expenses may discourage their investment in the fund. Also, new investors may be attracted by a fund because of its solid performance, which may not be able to sustain right after they pay a higher management fee to get in. This can lead to much disappointment for investors.

2) Asset Managers Face ‘Fierce’ Competition as Passive Boom Outlives the Pandemic

Institutional Investor  |  5/7/2021

Because… Asset managers are at a crossroads. According to Financial Times’ quote of ICI data, the global passive investment industry hit $15 trillion in assets last year with $7.71 trillion in ETFs and $7.76 trillion in index mutual funds. In the U.S. retail market, passively managed assets totaled $10.5 trillion at the end of March, compared to $14.2 trillion in actively managed funds. ETF assets of $5.7 trillion already surpassed the $4.8 trillion in index mutual funds. In 2020, passive funds, including ETFs and index mutual funds, raked in $408.8 billion, whereas active funds parted with $180.9 billion. In the first quarter of 2021, passive funds collected $263.2 billion, compared with flows of $147.1 billion into active funds. It is imperative for asset managers to develop strategies to better survive in this competitive industry. Fund firms need to demonstrate the viability of their strategies along with proven track records. They should also make investors aware how their managers differentiate themselves from indexers and add value to the benchmark-beating effort.

3) BlackRock to Launch the Sustainable High Yield Bond Fund

SEC Filings  |  5/7/2021

Because… More asset managers are adding the ESG screening to their bond fund investing process. Asset managers that look to launch ESG bond funds should consider whether the ESG screening can truly improve fund performance. In the equity space, a recent study shows many ESG funds are just expensive S&P 500 indexers. If the ESG criteria cannot boost fund performance, investors who want to align their investments with personal values should be informed so that they will not always expect higher returns. Fund sponsors should also ensure they can provide more ESG-related information. ESG Investors generally demand greater transparency. They care about what ESG criteria are used and how their funds are invested. However, we have found that most ESG bond fund sponsors treat their products the same as their non-ESG funds in terms of information disclosure. BlackRock recently projected that ESG investments could reach $1 trillion by 2030, which means the investor allocation to ESG bond funds could be increased in the decade too.