It all raises the question: are we seeing the decline of powerhouse fund managers that rely on stockpicking smarts?
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And if more consumers are putting their cash with a passive fund or a super giant, how can stock-pickers succeed in this far more competitive field?
Why are some big fund managers struggling?
Some reasons for long-term decline in Perpetual, Platinum and Magellan shares are company-specific. Magellan was thrown into turmoil following underperformance in its managed funds and the exit of founder Hamish Douglass in 2022; Platinum has been hit by outflows and the collapse of the approach from Regal; while Perpetual’s flows have also suffered, and sentiment among investors and analysts has soured.
But there is also a broader story about the challenges facing “active” fund managers due to major shifts in how households tend to invest in shares.
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Chief among these is the massive rise of exchange-traded funds (ETFs), vehicles that allow people to cheaply invest in a wide selection of stocks at a much lower cost than paying a stock-picker.
The ASX said investment in ETFs surged to $200 billion in 2024, with the market having grown 20-fold in the last decade. The rise of superannuation “mega funds” – those managing more than $100 billion – has also meant more super funds employ their own fund managers, leaving less opportunity for external stock-pickers.
With so much money flowing into ETFs and industry super funds, Morningstar analyst Shaun Ler says it has been getting harder for active managers to attract new money. “The pool of funds available for fund managers is contracting,” he says.
The competition from low-cost ETFs also squeezes fees, prompting managers to look at other ways to bolster profits, such as consolidating their systems, cutting staff or merging with rivals. Barring a marked improvement in fund managers’ performance, Ler believes the cycle of cost-cutting and merger-and-acquisition activity has further to run.
“Just looking at how active managers are performing today, I think that the trend will continue,” he says.
Peter Morgan, a former Perpetual equities chief, says funds management is a far more competitive field than in past decades, with many more firms vying to be equity managers.
Star stock-pickers still have a role, but it’s not what it was. “I’m not saying it’s completely dead. I’m not saying it’s impossible. It’s just, the playing field’s completely different to what it was 30 or 40 years ago,” he says.
Anton Tagliaferro, who founded Investors Mutual before retiring from the business in 2023, says the market environment has also been tricky for active equity managers, especially “value” investors trying to pick stocks with a low price compared to their book value.
That approach probably wouldn’t lead you to buy big stocks such as CBA in Australia or the Magnificent Seven tech giants in the US – but these were the big success stories of 2024.
“It’s been a tough time for many active fund managers to perform well, particularly value-style managers,” Tagliaferro says. “I think a lot of people would say many valuations don’t make a lot of sense because it’s really driven by the weight of money, rather than an upgrade in earnings.”
Decline of the stockpicker?
Despite the tougher backdrop for the likes of Magellan, Platinum and Perpetual, the overhaul in funds management is arguably a good news story for consumers. That’s because it should result in lower management fees, thanks to stiff competition from index funds, and super funds’ ability to spread their management costs over huge numbers of customers.
Garry Weaven, a former chair of industry super giant IFM Investors, highlights the potential for lower costs for consumers – though he cautions that there is a risk of “diseconomies of scale” if super funds become much larger than they are today.
Weaven stresses that this is not the situation right now. But he recalls that until the rise of super, there was a “complete oligopoly” of life companies, who became “very big, very ponderous” and lacking in motivation.
“I think by and large it’s a good news story so far, and it should show up in lower fees, other things being equal,” says Weaven, known as the “godfather” of industry super.
“The danger is of course that in the Australian market the concentration becomes more extreme. It’s not extreme at the moment … but there is a danger that it becomes so extreme that some of the diseconomies of scale start to creep into those institutions.”
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Ler also says the increase in competition and choice in funds management is a good thing from an investor’s perspective.
“People just want to see their money compound,” he says. “They are going for index funds and ETFs because these vehicles provide a better proposition.”
Does the turmoil in funds management spell the decline of the star stock-picker? Probably not, say experts and industry veterans, but the business model of big active equity managers will have to adjust.
That could mean more mergers, or it could mean funds target customers such as self-managed super funds, or private savings held outside super, rather than trying to win mandates from big super funds.
It could also mean fund managers move into more exotic products where it’s harder for retail investors to get exposure.
It’s telling, for example, that one of the big success stories in funds management in recent years – Phil King’s Regal Partners – has made significant bets on private credit, where investors lend to companies outside the banking system and bond markets. Regal in 2024 shelled out $235 million to buy an investment firm focused on private credit, Merricks Capital.
Despite the challenges facing active fund managers, there will probably always be a cohort of investors who want to entrust their cash to stock-pickers in the hope of getting superior returns. But Tagliaferro says fund managers will need to specialise their focus.
“You’ve got to find a niche now, particularly in Australian equities, as opposed to generally trying to beat the large-cap index.”
What investors want from a money manager – competitive returns – probably won’t change. But from the explosion in ETFs to the rise of super’s mega-funds, it’s a fair bet that the structural changes re-shaping the industry have further to run.
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