Todd Rosenbluth isdirector of exchange-traded fund and mutual fund research at S&P GlobalMarket Intelligence. The S&P Global Market Intelligence rankings for ETFsand mutual funds, available through MarketScope Advisor, are quantitativelyderived and based on performance, risks, costs and a qualitative analysis ofthe underlying holdings.
Advisers and investors should expect changes to the funduniverse ahead of and following implementation of the Department of Labor'sConflict of Interest Rule. This is one of the takeaways from the SeptemberS&P Global Market Intelligence survey of its asset management and financial advisoryclient base.
Some of the asset management respondents to the S&PGlobal Market Intelligence survey responded that they expect their firm'soperating model would change as a result of the rule. The most frequentlychosen answer given was "changes in expense ratios for existingfunds" followed by "creation of new products" and"increased focus on passive or index-based products."
Actively managed funds charge premiums for their efforts tooutperform a benchmark, even though the majority of the survey respondentsthink that passive funds provide comparable returns to active investing. Theaverage expense ratio for an actively managed Lipper large-cap core mutual fundwas 110 basis — significantly higher than the 5 basis points for the Vanguard500 Index ETF (VOO). The mutual fund peer group has incurred $36.2 billion ofnet outflows year-to-date through August, while VOO gathered $7.7 billion ofnew money.
Asset managers will need to be cognizant that advisers willbe questioning whether their clients' best interests are being served by activefunds that are more expensive than their peers.
The large-cap core share classes with the highest expenseratios and with more than $1 billion in assets under management includeClearbridge Value Trust (LMVTX), Davis New York Venture (NYVCX) and AmericanFunds Fundamental Investors (AFICX). Advisers that hold the C class products inclient portfolios get paid an annual fee, which might not be viewed as puttingclients' best interest before their own profit.
The increased focus on passive or index-based productsanswer given by the survey's asset management respondents is consistent withthe industry's efforts in the past year. Earlier this month, Fidelity announcedplans to launch six smart-beta equity ETFs, while and JPMorganhave rolled out active fixed-income products.
These products join a growing universe of ETFs offered bycompanies with strong presences in the active mutual fund world. Examples thatlaunched in the last year and ranked by S&P Global Market Intelligencebased on performance, risk and cost factors include Franklin LibertyQ GlobalDividend (FLQD), Goldman Sachs ActiveBeta International Equity (GSIE) and LeggMason US Diversified Core ETF (UDBI).
S&P Global Market Intelligence thinks one of the sidebenefits of the new fiduciary standard rule could be that advisers andinvestors will have more low-cost products to choose from.