WEBVTT - ICI’s Antoniewicz on Active’s Changing Landscape 0:00:15.040 --> 0:00:18.020 Welcome to Inside Active, a podcast about active managers that 0:00:18.040 --> 0:00:22.420 goes beyond soundbites and headlines and looks deeper into their processes, challenges, 0:00:22.540 --> 0:00:26.020 and philosophies in security selection. I'm David Cohn. I lead 0:00:26.079 --> 0:00:30.040 mutual fund and active research at Bloomberg Intelligence. Active management 0:00:30.080 --> 0:00:34.370 has undergone a significant transformation over the past decade. Investors 0:00:34.409 --> 0:00:37.790 have continued to move money away from actively managed mutual funds, 0:00:38.270 --> 0:00:41.670 while active ETFs have grown rapidly and fund expenses have 0:00:41.690 --> 0:00:46.930 continued to decline. At the same time, changes in financial advice, distribution, 0:00:47.070 --> 0:00:50.970 and investor preferences are reshaping how active management is packaged 0:00:51.110 --> 0:00:54.930 and delivered. That means the traditional active versus passive debate 0:00:55.070 --> 0:00:58.590 may not tell the whole story. Understanding where active management 0:00:58.650 --> 0:01:02.330 is headed also requires looking at the vehicles investors are choosing, 0:01:02.690 --> 0:01:05.530 what they're willing to pay, and how those choices differ 0:01:05.670 --> 0:01:09.610 across investors and distribution channels. Today, I wanted to take 0:01:09.660 --> 0:01:12.340 a broader look at those trends. What's driving the shift 0:01:12.380 --> 0:01:15.840 between mutual funds and ETFs? What fund flows can and 0:01:15.959 --> 0:01:19.240 can't tell us about investor behavior? How the economics of 0:01:19.400 --> 0:01:22.260 active management are changing? And what all of this could 0:01:22.340 --> 0:01:25.360 mean for the future of the industry? Joining me to 0:01:25.400 --> 0:01:29.810 discuss that is Shelley Antonavich, Chief Economist at the Investment 0:01:29.870 --> 0:01:32.470 Company Institute. Shelley, thanks for joining me. 0:01:32.990 --> 0:01:35.630 Hi, thanks so much for having me. I'm really thrilled 0:01:35.670 --> 0:01:36.369 to be here today. 0:01:36.770 --> 0:01:39.530 So, you know, when you look across ICI's data, how 0:01:39.550 --> 0:01:42.270 would you characterize the state of active management today? What, 0:01:42.290 --> 0:01:44.750 you know, what stands out most about how active management 0:01:44.790 --> 0:01:45.310 is evolving? 0:01:46.550 --> 0:01:48.570 Well, I think you hit the nail on the head. 0:01:48.750 --> 0:01:51.860 You know, I agree with you. I would characterize active 0:01:51.900 --> 0:01:56.020 management today as being in this period of transformation. You know, 0:01:56.160 --> 0:01:59.420 I know there's narratives out there that say active management 0:01:59.620 --> 0:02:04.110 is quote unquote dead. You know, I completely disagree with those. First, 0:02:04.170 --> 0:02:08.380 you know, there's the sheer size. Actively managed mutual funds 0:02:08.600 --> 0:02:14.850 and ETFs collectively had over $ 18 trillion in assets under 0:02:14.889 --> 0:02:21.230 management at the end of July. That's up almost 70% 0:02:21.230 --> 0:02:28.040 from $ 11 trillion a decade ago. So definitely not shrinking. Second, 0:02:28.400 --> 0:02:33.770 active ETFs and active bond mutual funds are thriving. In 0:02:33.810 --> 0:02:37.869 just the last two and a half years alone, actively 0:02:37.910 --> 0:02:44.630 managed ETFs have seen $ 1. 2 trillion and active bond mutual 0:02:44.710 --> 0:02:49.210 funds another $ 300 billion in net new money come into 0:02:49.250 --> 0:02:56.770 their funds. Third, I think more indexing absolutely does not 0:02:56.970 --> 0:03:01.769 mean less active management. You know, if you think about 0:03:01.930 --> 0:03:07.570 fee-based advisors, that's one example. Fee-based advisors have taken a 0:03:07.910 --> 0:03:11.609 more active role in managing their clients' assets through the 0:03:11.750 --> 0:03:17.019 use of allocation models or model portfolios, and they're implementing 0:03:17.100 --> 0:03:21.560 these active strategies using index funds. So while an advisor 0:03:21.620 --> 0:03:26.820 may select an index fund, their client's overall portfolio construction 0:03:27.380 --> 0:03:32.799 tactical allocations, tax management, and rebalancing are often highly active. 0:03:33.690 --> 0:03:38.270 So in sum, for me, the industry's evolution is not 0:03:38.330 --> 0:03:44.770 about investors abandoning active management. It's about active management changing form. 0:03:45.430 --> 0:03:46.720 Now you make a good point. And I kind of 0:03:46.740 --> 0:03:48.520 want to go back to the end there when you 0:03:48.560 --> 0:03:50.920 talk about index investing, because I think when a lot 0:03:50.940 --> 0:03:53.520 of people talk about the growth of passive investing, you know, 0:03:53.560 --> 0:03:56.140 what was happening kind of before the whole recent surge 0:03:56.180 --> 0:03:58.860 in active, you know, we often treat active and passive 0:03:58.900 --> 0:04:01.470 as competing for the same dollar. But, you know, from 0:04:01.670 --> 0:04:05.770 ICI's research, it sounds like the investor or advisor behavior 0:04:05.830 --> 0:04:06.810 isn't that straightforward. 0:04:08.050 --> 0:04:10.890 No, from my perspective, I don't believe the industry is 0:04:11.010 --> 0:04:15.850 a zero-sum competition between active and index. Active and index 0:04:15.910 --> 0:04:21.920 are complements and definitely can work together within an investor's portfolio. 0:04:22.400 --> 0:04:25.470 So for You know, these are just examples I'm going 0:04:25.510 --> 0:04:28.990 to use. An investor may have index equity funds as 0:04:29.050 --> 0:04:32.950 their core holdings, but for their fixed income exposure, they 0:04:33.010 --> 0:04:36.479 select an active bond fund. Why would they want to 0:04:36.520 --> 0:04:40.839 do this? Active bond funds have more flexibility to set 0:04:40.900 --> 0:04:46.169 and adjust their duration, and that is particularly useful if 0:04:46.320 --> 0:04:49.290 interest rates are on the rise because that can help 0:04:49.390 --> 0:04:54.440 mitigate losses by reducing their duration. Or think about an 0:04:54.520 --> 0:04:59.720 investor who wants exposure to alternatives like private assets. Retail 0:04:59.779 --> 0:05:04.599 alternatives are generally still an active management business with strategies 0:05:04.740 --> 0:05:08.700 requiring specialized research or active risk management. 0:05:09.670 --> 0:05:12.169 Now, you make a good point there. You know, I'm 0:05:12.190 --> 0:05:14.950 still waiting for the day when privates do become passive. 0:05:15.029 --> 0:05:17.789 And I think they'll be kind of interesting and complicated, 0:05:17.870 --> 0:05:20.900 but be fun to watch. Yeah. Another thing I wanted 0:05:20.920 --> 0:05:22.990 to ask, you know, we often use fund flows as 0:05:23.050 --> 0:05:26.590 a measure of investor preferences. How much do you think 0:05:26.610 --> 0:05:29.349 we can actually infer about investor behavior from flows? And 0:05:29.470 --> 0:05:31.570 you think those numbers, we can kind of miss something 0:05:31.790 --> 0:05:32.450 from those numbers? 0:05:33.589 --> 0:05:36.760 Flows can tell us a lot about changes in investor 0:05:36.880 --> 0:05:40.160 preferences or their risk appetites, but we have to be 0:05:40.200 --> 0:05:44.500 really careful not to over-interpret them. So, you know, some 0:05:44.540 --> 0:05:49.070 flow patterns are definitely reflect short-term influences, such as like 0:05:49.150 --> 0:05:53.560 bonus payments or capital gains distributions or tax deadlines. And 0:05:53.620 --> 0:05:58.620 these induce seasonality in the flows. You know, one example 0:05:58.760 --> 0:06:02.120 is funds tend to have above average inflows in the 0:06:02.160 --> 0:06:05.110 first few months of the year as people invest their 0:06:05.140 --> 0:06:10.630 annual bonuses or make contributions to their IRS. I'll often, 0:06:10.650 --> 0:06:13.310 I do a lot of press interviews and I'll have 0:06:13.710 --> 0:06:17.150 reporters sort of want to talk to me after they 0:06:17.230 --> 0:06:22.150 see one week of, you know, inflows into equity funds 0:06:22.240 --> 0:06:25.419 and outflows from bond funds. And they'll say, oh, is 0:06:25.460 --> 0:06:28.580 this the start of the rotation? And I want to 0:06:28.640 --> 0:06:31.340 say to them, come back to me in about six months. 0:06:31.860 --> 0:06:34.640 And if we've seen this pattern over six months, then 0:06:34.680 --> 0:06:39.420 we can talk about that. You know, other flow trends 0:06:40.279 --> 0:06:46.610 reflect longer term forces, such as demographics, retirement savings patterns 0:06:46.730 --> 0:06:51.610 or even changes in product preferences. We've seen that. The 0:06:51.830 --> 0:06:55.260 aging of the baby boom generation is often cited as 0:06:55.380 --> 0:06:58.520 contributing to the strong demand for bond funds that we've 0:06:58.560 --> 0:07:02.540 seen over the past 15 years. I think just as 0:07:02.620 --> 0:07:10.830 important to looking at short-term fluctuations, long-term influences, I think 0:07:10.890 --> 0:07:13.390 what's just as important to keep in mind is that 0:07:13.450 --> 0:07:17.220 the flow data, Particularly the data ICI publishes are an 0:07:17.320 --> 0:07:21.480 aggregate measure. And they can mask a great deal of 0:07:21.580 --> 0:07:25.120 underlying activity. So let me just give you a really 0:07:25.230 --> 0:07:30.550 simple example. You can have one investor sell $ 1, 000 of 0:07:30.590 --> 0:07:38.070 a fund while another investor buys $ 1, 000 of the same fund, say. Well, 0:07:38.550 --> 0:07:44.250 you know, the net flow here is zero, which... you'd say, okay, 0:07:44.310 --> 0:07:49.710 nothing happened. But in reality, there was significant trading if 0:07:49.770 --> 0:07:53.210 those were the only two trades the fund had. There 0:07:53.250 --> 0:07:58.910 was significant trading and potentially very different investor motivations and viewpoints. 0:07:59.970 --> 0:08:03.360 That's why I think VLOs are sort of best used 0:08:03.480 --> 0:08:08.400 as a useful signal rather than a complete picture of 0:08:08.480 --> 0:08:09.520 investor behavior. 0:08:09.660 --> 0:08:12.480 No, it makes a lot of sense. You know, I 0:08:12.520 --> 0:08:14.920 do want to, you know, I know everyone talks about 0:08:14.960 --> 0:08:18.740 mutual funds versus ETFs. And, you know, the industry is 0:08:18.880 --> 0:08:22.440 kind of increasingly choosing ETFs over mutual funds in a 0:08:22.480 --> 0:08:24.620 lot of places. And, you know, I'm just curious how 0:08:24.670 --> 0:08:29.570 much we can attribute that to cost, taxes, and trading flexibility, which, 0:08:29.630 --> 0:08:31.390 you know, we've already heard is like the benefits of 0:08:31.450 --> 0:08:34.750 ETFs versus actually, you know, how financial advice is being 0:08:34.790 --> 0:08:35.410 delivered today. 0:08:36.950 --> 0:08:40.790 So you're right. ETFs are increasingly popular with retail investors. 0:08:41.620 --> 0:08:45.709 We've done surveys for many, many years looking at, you know, 0:08:45.890 --> 0:08:49.809 ownership of mutual funds, ownership of ETFs. And in 2015, 0:08:49.809 --> 0:08:52.490 our survey showed that just 5% of U.S. households owned ETFs. 0:08:52.590 --> 0:08:54.290 As of 2025, we estimate that 15% or 20 million U.S. 0:08:54.330 --> 0:08:58.689 households owned ETFs. And I expect when we publish our 0:08:58.690 --> 0:09:13.190 2026 figure next month, that's going to be even higher. 0:09:14.510 --> 0:09:18.640 You know, as for the factors influencing or driving the 0:09:18.679 --> 0:09:23.080 demand for ETFs, it's really hard to rank them by 0:09:23.160 --> 0:09:27.800 their sort of relative importance. In our surveys, you know, 0:09:27.900 --> 0:09:34.750 around 95% of ETF owners cite cost-effectiveness and diversification as 0:09:34.790 --> 0:09:40.230 the top reasons for why they invest in ETFs. And about... 90% 0:09:40.230 --> 0:09:43.940 said they appreciated the tax efficiency and the ability to 0:09:44.100 --> 0:09:48.280 trade during the day. You know, we do know that 0:09:48.400 --> 0:09:53.590 more brokers and financial advisors are using ETFs in their clients' portfolios. 0:09:54.650 --> 0:10:02.600 If you look at, data from 2014, fee-based advisors had 17% 0:10:02.600 --> 0:10:07.440 of their clients' household assets invested in ETFs. Roll forward 0:10:07.440 --> 0:10:08.939 10 years to 2024, that ETF share is up to 49%. 0:10:08.940 --> 0:10:22.059 And I'm likely is still rising. We'll get a read 0:10:22.179 --> 0:10:27.290 on the 2025 data this fall. So we'll be able 0:10:27.350 --> 0:10:31.590 to update that stat. But what I think is this 0:10:31.710 --> 0:10:36.390 shift reflects something I mentioned earlier, that fee-based advisors are 0:10:36.450 --> 0:10:41.770 increasingly using model portfolios that have index funds, and it's 0:10:41.910 --> 0:10:45.460 predominantly index ETFs as their building blocks. 0:10:45.980 --> 0:10:49.750 That's interesting. We talk a lot about the whole mutual 0:10:49.770 --> 0:10:53.740 fund ETF shift as if every investor and every distribution 0:10:53.780 --> 0:10:56.339 channel is just moving in the same direction. Where do 0:10:56.360 --> 0:10:59.520 you think mutual funds remain particularly durable and what would 0:10:59.700 --> 0:11:00.700 explain that resilience? 0:11:02.000 --> 0:11:05.380 So one area where mutual funds remain especially durable is 0:11:05.480 --> 0:11:10.260 the defined contribution market. In a 401k plan, participants are 0:11:10.360 --> 0:11:15.970 typically making regular contributions every pay period. you know, often 0:11:16.050 --> 0:11:20.449 it's every two weeks. And they're, you know, relatively small 0:11:20.530 --> 0:11:24.490 amounts when you consider what sort of investments, you know, 0:11:24.510 --> 0:11:30.670 when you're making your investments. And mutual funds are particularly 0:11:30.870 --> 0:11:35.070 well suited to that environment because they can easily accommodate 0:11:35.150 --> 0:11:40.300 fractional share investing and they have seamless record keeping. Some 0:11:40.380 --> 0:11:45.579 features of the ETF that make ETFs attractive in taxable 0:11:45.679 --> 0:11:51.570 brokerage accounts are also less relevant in retirement plans. Intraday trading, 0:11:52.070 --> 0:11:56.810 for example, provides limited value to a long-term retirement saver 0:11:56.929 --> 0:12:04.000 making periodic contributions. Similarly, the tax efficiency often associated with 0:12:04.100 --> 0:12:08.160 ETFs are largely moot inside a tax-deferred retirement account. 0:12:09.059 --> 0:12:11.190 You know, one of the things, the big stories over 0:12:11.210 --> 0:12:12.830 the last year or so has been the share class. 0:12:12.910 --> 0:12:15.650 And I think a lot of folks were focusing on 0:12:15.950 --> 0:12:18.210 the ETF share class of the mutual fund, but also 0:12:18.230 --> 0:12:20.890 the mutual fund share class of the ETF is something. 0:12:20.950 --> 0:12:24.260 And so, you know, do you expect ETFs to eventually 0:12:24.320 --> 0:12:26.960 make greater inroads, whether that is with, you know, the 0:12:27.280 --> 0:12:29.640 mutual fund share class of an ETF? Or do you 0:12:29.660 --> 0:12:32.240 think there'll be more of CIT's domains? 0:12:33.770 --> 0:12:37.290 Well, I think one challenge to widespread adoption of ETFs 0:12:37.450 --> 0:12:41.719 in 401ks is the need for a brokerage window. So 0:12:42.059 --> 0:12:46.319 even if you have an, you know, ETF share class 0:12:46.440 --> 0:12:48.839 of a mutual fund, you still have to have a 0:12:49.000 --> 0:12:51.580 brokerage window to get to that ETF because that ETF 0:12:51.640 --> 0:12:58.020 is trading on a secondary market. And so plan participants 0:12:58.090 --> 0:13:01.929 in order, you know, a defined contribution or 401k plan 0:13:01.970 --> 0:13:05.929 participants in order to get access to ETFs, they need 0:13:05.960 --> 0:13:11.260 that brokerage window. And because of cost consideration and operational hurdles, 0:13:11.800 --> 0:13:18.260 relatively few 401k plans have a brokerage window. I think 0:13:18.300 --> 0:13:20.140 you also asked about CITs. 0:13:20.160 --> 0:13:22.620 Yes, yes. 0:13:23.100 --> 0:13:27.540 Yeah. So CITs have definitely, though, been gaining market share 0:13:27.780 --> 0:13:33.120 in large 401k plans. In 2024, which is the latest 0:13:33.160 --> 0:13:38.590 data we have available, 37% of large 401k plan assets 0:13:38.650 --> 0:13:43.750 were in CITs. And that's up from 12% in 2010. And, 0:13:44.890 --> 0:13:48.430 you know, while CITs and mutual funds operate similarly in 0:13:48.610 --> 0:13:53.490 many of our members, at ICI offer both products to 0:13:54.070 --> 0:13:59.310 401k plan sponsors, CITs have a less burdensome regulatory structure. 0:13:59.350 --> 0:14:02.150 For example, they don't have as many disclosure documents to 0:14:02.220 --> 0:14:06.030 prepare and file, and they're often not subject to some 0:14:06.100 --> 0:14:10.020 of the same rules that mutual funds are. This translates 0:14:10.120 --> 0:14:13.959 into lower compliance costs for CITs, which they can use 0:14:14.059 --> 0:14:16.240 to competitively price their products. 0:14:16.679 --> 0:14:19.920 That makes sense. As ETFs do account for this growing 0:14:19.960 --> 0:14:23.220 share of the fund business, has that changed the competitive 0:14:23.260 --> 0:14:26.310 dynamics of the asset management industry itself? You know, who 0:14:26.350 --> 0:14:30.190 can compete, how firms distribute products, or even the scale 0:14:30.230 --> 0:14:31.090 needed to succeed? 0:14:32.630 --> 0:14:34.570 I think the first thing we need to remember is 0:14:34.610 --> 0:14:39.800 that the asset management industry has always been highly competitive. 0:14:40.950 --> 0:14:48.940 Firms have continually adapted to changes in investor preferences, distribution channels, technology, 0:14:49.160 --> 0:14:54.500 and product innovation. What's interesting is that competition is becoming 0:14:54.680 --> 0:15:00.370 less about the wrapper and more about delivering value to investors. 0:15:00.950 --> 0:15:06.450 So investors are looking for outcomes, exposures, advice, and efficient implementations. 0:15:06.870 --> 0:15:10.710 And whether those are delivered through a mutual fund, an ETF, 0:15:10.770 --> 0:15:15.310 a CIT, or some other structure, you know, they're really, 0:15:15.330 --> 0:15:21.000 you know, that isn't as critical to them. That said, 0:15:21.280 --> 0:15:26.200 one development that could prove, you know, especially significant is 0:15:26.560 --> 0:15:30.500 what you mentioned before, the ETF share class of a 0:15:30.540 --> 0:15:35.100 mutual fund. If ETF share classes become widely available, this 0:15:35.180 --> 0:15:38.450 could reduce some of the distinction between mutual funds and 0:15:38.530 --> 0:15:43.310 ETFs by allowing firms to offer both structures within the 0:15:43.350 --> 0:15:48.630 same fund. This would give investors more choice and potentially 0:15:48.700 --> 0:15:53.720 lower operational barriers for fund sponsors. You know, on the 0:15:53.820 --> 0:15:59.150 other hand, if the Growth Act, which levels the tax 0:15:59.250 --> 0:16:03.940 treatment of mutual funds and ETFs is approved by Congress, 0:16:04.520 --> 0:16:08.900 there could be more limited use of the ETF share class. 0:16:09.230 --> 0:16:09.890 It's interesting. 0:16:09.910 --> 0:16:11.590 I haven't thought about that. You know, if we kind 0:16:11.610 --> 0:16:14.430 of just stay on the topic of ETFs in general, 0:16:14.770 --> 0:16:18.740 do you see active ETFs primarily taking assets from active 0:16:18.770 --> 0:16:22.140 mutual funds or Are they expanding the addressable market for 0:16:22.400 --> 0:16:25.750 active management and potentially competing for assets that otherwise would 0:16:25.770 --> 0:16:27.070 have gone to index products? 0:16:28.010 --> 0:16:30.910 I think it's probably a bit of both. Some of 0:16:30.950 --> 0:16:35.550 the growth in active ETFs is clearly coming from investors 0:16:35.630 --> 0:16:42.450 and asset managers migrating existing active strategies out of mutual 0:16:42.510 --> 0:16:46.740 funds and into an ETF wrapper. In those cases, the 0:16:46.860 --> 0:16:52.400 underlying investment philosophy hasn't changed. But investors may prefer the 0:16:52.560 --> 0:16:57.280 ETF's distribution, trading, or tax efficiency. But I also think 0:16:57.480 --> 0:17:03.320 active ETFs are expanding the addressable market for active management. Historically, 0:17:03.400 --> 0:17:08.300 investors who maybe preferred the ETF wrapper had more limited 0:17:08.540 --> 0:17:12.580 access to active strategies in that format. And as more 0:17:12.760 --> 0:17:15.939 active ETFs have come to market, investors who might have 0:17:16.180 --> 0:17:20.919 otherwise preferred chosen, say, an index ETF can now access 0:17:21.050 --> 0:17:24.250 active management in a vehicle that fits how they want 0:17:24.369 --> 0:17:28.990 to build their portfolio. This, I think, suggests that competition 0:17:29.070 --> 0:17:33.189 in the industry is not simply active ETF versus active 0:17:33.290 --> 0:17:38.230 mutual fund. I think increasingly active ETFs are competing across 0:17:38.270 --> 0:17:43.040 a broader landscape that includes index ETFs. And more broadly, 0:17:43.500 --> 0:17:46.860 this may be another example of why sort of the 0:17:46.960 --> 0:17:53.530 simple active versus passive narrative can be misleading. Investors often 0:17:53.590 --> 0:17:58.969 make decisions about vehicle structure, distribution channel, tax efficiency, or 0:17:59.050 --> 0:18:04.490 portfolio implementation first. Then they choose between an active and 0:18:04.670 --> 0:18:08.390 index exposure within sort of what they consider is their 0:18:08.450 --> 0:18:09.760 preferred structure. Okay. 0:18:10.740 --> 0:18:12.179 And I did want to, because I think ICI is 0:18:12.220 --> 0:18:15.460 particularly great with these type of things, is just your 0:18:15.500 --> 0:18:19.950 view on generational changes in fund ownerships. Obviously, it's been changing. 0:18:20.050 --> 0:18:23.629 Do you think that fund ownership could eventually change the 0:18:23.650 --> 0:18:25.890 types of products that dominate the industry if we go 0:18:25.930 --> 0:18:27.890 from generation to generation? Yeah. 0:18:28.330 --> 0:18:32.680 So there are clear generational forces that continue to shape 0:18:32.740 --> 0:18:35.160 the industry over the long run. Some of the data 0:18:35.180 --> 0:18:39.990 that we have you know, shows that about one third 0:18:40.230 --> 0:18:45.550 of ETF owning households are millennials, and they're more likely 0:18:45.670 --> 0:18:52.180 to encounter ETFs through digital platforms and fee-based advisory relationships. 0:18:52.740 --> 0:18:54.820 And I think part of that is we got to 0:18:54.880 --> 0:19:00.080 remember these younger households are entering the financial markets through 0:19:00.100 --> 0:19:06.619 a very different ecosystem than previous generations. And these younger 0:19:06.660 --> 0:19:11.140 generations are tending to favor the ETF wrapper in their 0:19:11.240 --> 0:19:15.220 taxable accounts. That said, I'd be cautious about drawing a 0:19:15.300 --> 0:19:19.540 straight line from demographics to the future dominance of any 0:19:19.619 --> 0:19:23.840 single product. Different products tend to serve different investor needs 0:19:23.900 --> 0:19:27.300 and distribution channels. So, you know, we were just talking 0:19:27.380 --> 0:19:30.840 about the retirement space. You know, mutual funds and ETFs 0:19:30.900 --> 0:19:36.100 remain deeply embedded in retirement plans. While ETFs have become 0:19:36.140 --> 0:19:41.440 increasingly important in brokerage and advisory accounts. And so, you know, 0:19:41.550 --> 0:19:45.990 as younger cohorts accumulate wealth, we may continue to see 0:19:46.030 --> 0:19:51.820 strong demand for ETF-based solutions in their tech. accounts. But 0:19:52.000 --> 0:19:55.780 the larger trend is likely to be continued innovation across 0:19:56.640 --> 0:19:58.080 all the product structures. 0:19:58.440 --> 0:20:01.140 It'll definitely be something to watch. And, you know, something 0:20:01.180 --> 0:20:05.480 else that we've been watching is fund expenses. And, you know, 0:20:05.520 --> 0:20:07.930 I think it's one of the The most striking long-term 0:20:08.010 --> 0:20:11.790 trend from ICI's research is this decline in fund expenses. 0:20:11.810 --> 0:20:14.190 What do you think has been the biggest force driving 0:20:14.230 --> 0:20:17.170 fees lower, particularly for actively managed funds? 0:20:18.490 --> 0:20:23.710 Yeah, we publish an annual report on fund fees every year. 0:20:23.800 --> 0:20:27.100 And we look at index mutual funds, active mutual funds, 0:20:27.220 --> 0:20:31.119 index ETFs, active ETFs. It's a very detailed report. It 0:20:31.180 --> 0:20:35.000 comes out March, towards the end of March every year. 0:20:36.340 --> 0:20:39.680 And our report from this year showed that if you 0:20:39.780 --> 0:20:46.040 look at actively managed mutual funds, the average expense ratio 0:20:46.160 --> 0:20:52.290 for an equity active mutual fund has fallen 41% over 0:20:52.350 --> 0:20:56.510 the past 29 years. So that's quite a big decline. 0:20:56.890 --> 0:21:01.830 I mean, and that certainly benefits to investors in these funds. 0:21:02.530 --> 0:21:06.770 What are the factors that contribute to this decline? First, scale. 0:21:07.150 --> 0:21:10.730 Scale matters a lot because as funds grow and fixed 0:21:10.770 --> 0:21:14.910 costs are spread across a larger asset base, this reduces 0:21:15.030 --> 0:21:17.810 the cost of managing those assets and those savings are 0:21:17.869 --> 0:21:23.300 just passed on to investors through lower expense ratios. Second, 0:21:23.820 --> 0:21:31.180 investor sensitivity to cost has increased substantially. Investors, advisors, retirement plans, 0:21:31.380 --> 0:21:35.609 institutional clients are paying very close attention to fees. and 0:21:35.650 --> 0:21:40.510 they're creating strong incentives for active fund sponsors to keep 0:21:40.630 --> 0:21:47.250 costs competitive. Third, it's your classic competitive pressure. The rise 0:21:47.270 --> 0:21:53.950 of index mutual funds and index ETFs has intensified competition 0:21:54.010 --> 0:21:59.600 across the entire asset management industry. Even though actively managed 0:21:59.730 --> 0:22:05.280 funds and index funds can serve the same investors the 0:22:05.320 --> 0:22:11.540 same investor's needs, the availability of lower cost investment auctions 0:22:11.720 --> 0:22:17.300 has certainly pushed active managers to reduce expenses where possible. 0:22:18.460 --> 0:22:23.200 And then finally, even within the active fund universe, we 0:22:23.359 --> 0:22:28.879 see that money has increasingly flowed toward lower cost funds 0:22:29.700 --> 0:22:35.470 within the active managed space. So You know, investors aren't 0:22:35.690 --> 0:22:39.800 just simply choosing between active and index. They're often choosing 0:22:39.880 --> 0:22:43.060 among active funds with different cost structures. 0:22:43.580 --> 0:22:47.220 So do you think that the falling fees have narrowed, 0:22:47.500 --> 0:22:50.280 you know, I guess what we would consider a disadvantage 0:22:50.300 --> 0:22:53.560 for active managers? They have to not only beat their benchmark, 0:22:53.600 --> 0:22:55.879 but they also have to overcome a high fee. Do 0:22:55.900 --> 0:22:57.440 you think that's narrowed that or is it kind of, 0:22:57.440 --> 0:23:00.140 do you think the competition's really just reset what investors 0:23:00.180 --> 0:23:02.959 consider acceptable fees for active management? 0:23:03.700 --> 0:23:07.180 Well, you know, fees are just one component of an 0:23:07.240 --> 0:23:10.250 investor's decision. And I think we're going to talk a 0:23:10.310 --> 0:23:15.530 little bit later about besides cost, what else do investors 0:23:15.650 --> 0:23:19.430 value when they're looking to buy a fund? But all 0:23:19.530 --> 0:23:23.469 else equal, you're right. Lower fees make an actively managed 0:23:23.530 --> 0:23:28.500 fund more attractive because they reduce that performance hurdle that 0:23:28.540 --> 0:23:33.170 the manager needs to overcome. You know, At the same time, 0:23:33.390 --> 0:23:38.369 investors ultimately care about outcomes, and lower fees can help 0:23:38.470 --> 0:23:44.379 get an active strategy onto an investor shortlist. That said, 0:23:44.900 --> 0:23:50.340 active managers still need to deliver a compelling investment experience 0:23:50.460 --> 0:23:56.379 by demonstrating performance, risk management, or other forms of value. 0:23:56.040 --> 0:24:00.900 To the investor. With fees, though, with an index fund, 0:24:00.980 --> 0:24:05.159 there's not a whole lot of money that a company... 0:24:04.900 --> 0:24:07.340 I mean, obviously, there is money to manage a fund 0:24:07.400 --> 0:24:11.080 in general. But with active, with fees, they help pay 0:24:11.119 --> 0:24:15.360 for research, portfolio management, distribution, and just all the rest 0:24:15.400 --> 0:24:17.790 of the business. So do you see signs that fee 0:24:17.810 --> 0:24:21.150 compression is approaching a floor, especially in active management? 0:24:22.670 --> 0:24:25.210 So... You know, my view is that right now what 0:24:25.250 --> 0:24:28.570 we're seeing is a slowing in this long run decline 0:24:28.630 --> 0:24:32.410 in fees rather than kind of approaching a hard floor. 0:24:32.850 --> 0:24:36.070 You know, it's true that after decades of steady declines, 0:24:36.150 --> 0:24:41.470 expense ratios for actively managed equity mutual funds have flattened 0:24:41.770 --> 0:24:45.109 somewhat in recent years. You know, this suggests that many 0:24:45.150 --> 0:24:50.070 of the easiest opportunities for fee reductions have already been realized. 0:24:50.770 --> 0:24:56.109 But Looking ahead and just thinking about technological innovation and 0:24:56.490 --> 0:25:04.480 operational efficiencies, I really believe there's still room for further 0:25:04.540 --> 0:25:10.520 rate reductions over time. Advancements in technology and AI have 0:25:10.560 --> 0:25:17.210 the potential to improve efficiency in portfolio management, back office operations, compliance, reporting, 0:25:17.270 --> 0:25:21.710 and other administrative functions. To the extent those efficiencies lower 0:25:21.750 --> 0:25:26.190 the cost of running the active funds, competitive pressures will 0:25:26.280 --> 0:25:29.439 force those savings to be passed along to investors. 0:25:29.460 --> 0:25:31.960 Okay. On the same note, I know when I entered 0:25:31.980 --> 0:25:33.700 the industry, there was still a ton of money going 0:25:33.740 --> 0:25:36.120 into load funds. And I think a lot of ETF 0:25:36.140 --> 0:25:39.050 investors have no idea what a load is. But, you know, 0:25:39.090 --> 0:25:41.170 do you think the shift away from loads and even 0:25:41.190 --> 0:25:44.830 12B1 fees, towards more fee-based, you know, you think it's 0:25:44.850 --> 0:25:47.429 changed the economics of the mutual fund industry and the 0:25:47.470 --> 0:25:50.310 way we should think about the cost investors actually pay 0:25:50.350 --> 0:25:51.410 for investment management? 0:25:52.790 --> 0:25:56.220 I think one of the clearest signs we've seen of 0:25:56.520 --> 0:26:01.740 how the fund industry has evolved over, you know, over 0:26:02.220 --> 0:26:05.200 the last few decades is that today over 90% of 0:26:05.460 --> 0:26:13.520 long-term mutual fund sales go to no-load funds without 12b1 fees. 0:26:13.859 --> 0:26:18.199 So there is very, very little being sold through the 0:26:18.220 --> 0:26:22.300 mutual fund channel with, you know, certainly with a load 0:26:23.220 --> 0:26:26.980 and or even a 12b1 fee. And as you noted, 0:26:27.580 --> 0:26:33.649 you know, that is up dramatically from previous decades. But 0:26:33.710 --> 0:26:38.990 that doesn't necessarily mean investors are paying nothing for advice. 0:26:39.590 --> 0:26:44.560 So when you think about, you know, the cost of 0:26:44.700 --> 0:26:49.920 what investors actually pay, you have to remember that some 0:26:50.000 --> 0:26:54.440 of that load, some of that 12B1 fee really was 0:26:54.920 --> 0:27:00.050 being diverted to the financial advisor. And that's not happening anymore. 0:27:00.150 --> 0:27:06.310 Financial advisors have changed their compensation models. They're being paid directly. uh, 0:27:06.410 --> 0:27:13.540 by investors now, um, not through 12B1 fees and, but 0:27:14.300 --> 0:27:19.979 you can't just say, oh, you know, invest that and 0:27:20.060 --> 0:27:23.350 just look at the fund expense ratios. You have to 0:27:23.470 --> 0:27:28.230 also consider the cost of advice and that advice now 0:27:28.510 --> 0:27:33.170 is being charged separately from the fund. Um, So, you know, 0:27:33.250 --> 0:27:37.970 when you're looking at costs, it's important to look beyond 0:27:38.350 --> 0:27:39.909 the fund expense ratio. 0:27:40.230 --> 0:27:42.620 No, yeah, I think it definitely makes it more transparent 0:27:42.650 --> 0:27:46.580 and beneficial to the investors or end investors. You know, 0:27:46.600 --> 0:27:50.040 earlier we talked about advisors and investors kind of combining 0:27:50.080 --> 0:27:54.060 both passive and active in the same portfolio. You know, 0:27:54.100 --> 0:27:57.020 but we've also noticed that a lot of ETF-owning households 0:27:57.200 --> 0:28:00.510 also own mutual funds. So, Just curious what your research 0:28:00.590 --> 0:28:03.390 tells us, how investors are actually using those two vehicles 0:28:03.450 --> 0:28:05.230 together in the same portfolio. 0:28:06.609 --> 0:28:08.850 I think, you know, and you hit on it. One 0:28:08.890 --> 0:28:13.850 of the most interesting findings from ICI's research is that 0:28:14.109 --> 0:28:23.129 ETF investors are rarely ETF-only investors. In fact, 86% of 0:28:23.410 --> 0:28:29.470 ETF-owning households also own mutual funds. And so when we 0:28:29.570 --> 0:28:32.889 look at that, and I had one of my team 0:28:33.310 --> 0:28:36.409 members pull some data on this. So when we look 0:28:36.590 --> 0:28:40.110 at that group, that group of households that own both 0:28:40.490 --> 0:28:47.739 mutual funds and ETS, and what we're finding there is 0:28:47.800 --> 0:28:52.380