The competitive position of active managers is weakening and they will be unable to compete with passive players unless they diversify their product range, according to Morningstar.
In its Q3 industry pulse report for fund management, Morningstar said flows had been boosted in the quarter driven by expectations of falling interest rates in FY25, but that the gains are only cyclical.
The ratings house covered GQG, Challenger, Insignia, Magellan, Perpetual, Pinnacle and Platinum, and flagged most of the fund flows came from funds flowing between various providers rather than a collective gain.
“Flow movement among this cohort suggests business wins are at the expense of close peers rather than structural gains from low-cost alternatives.
“Recent business wins mainly reflect flows into non-traditional asset classes like private debt, private equity, and specialised fixed-income strategies. In contrast, flows into equities managed by traditional active managers remain weak and are likely to stay subdued in the long term.”
The demand for non-traditional asset classes would be a key way for firms to potentially gain market share from low-cost passive players, but expertise is difficult to build in these sectors as fewer portfolio managers have experience in the area.
“We believe traditional active managers’ competitive position is weakening overall. However, they can partially mitigate share losses to ETFs and industry funds by diversifying into more niche or exotic products that are harder to replicate through passive options.
“Flow prospects are greater for other categories, such as private debt, private equity or systematic trend strategies, but it is difficult to build up such expertise.”
A similar report from Deloitte earlier this week stated having a diverse product mix needs to be “front and centre” for investment managers in order to grow revenue and differentiate themselves from peers.
Beyond product range, Morningstar said asset managers also need to improve their fund performance, cut costs, better align remuneration with shareholder interests, and increase investment in distribution.
Looking at the performance of specific asset managers, it said Magellan and Platinum have the most acute risk of fee compression, while Platinum is also likely to suffer from a rapid loss of institutional mandates.
GQG and Pinnacle are identified as strong performers that can grow their margins with revenue outpacing costs, but Platinum and Perpetual will need to cut costs, it said. Even with cost cutting to support earnings, the two firms are still unlikely to see long-term profit gains from the action.
