Fund managers of active fixed income strategies are rethinking their pricing as financial advisers and institutional investors drive a harder bargain in a lower-returning world, and new retail opportunities beckon.
Several fixed interest giants, including Nikko, Schroders and Aberdeen Standard have dropped fees in recent months.
The primary driver is the lower expected yield from fixed income assets, according to Rodney Sebire, Zenith's head of global fixed income research and alternatives.
"Many active fixed income managers are rebasing their fees, as the actual return expectations have come down," Sebire says.
"If the yield to maturity on [government bond indices] is less than 2%, it is just not fair for a manager to be charging a third [60 or 70bps] of the expected return in fees."
Adding to lowering yield expectations are new opportunities in retail distribution, such as active ETFs and managed accounts, for which active fixed income houses seem to be willing to bend on fees in exchange for a bigger slice of retail and intermediary money.
Over the last three months, Kapstream Capital, Aberdeen Standard Investments and Schroders have all knocked down fees on their absolute fixed interest strategies by over 10bps each.
Kapstream and Schroders took the fee cut as they headed towards listing an active ETF on the exchange.
Active fixed income ETFs are a recent invention with the first product kicking off just last year but the ETF segment's inflows are still tilted towards lower-cost products.
This investor appetite for lower-cost exposures is an unassailable driver in pricing for Morningstar director of manager research Tim Wong.
"As it stands, there are now ETFs tracking most major bond indices, including some credit indices, and there have been some low-cost fixed interest products in the unlisted space as well over the last three years," Wong says.
A third driver in active fees is a shift in the nature of an adviser's role. They are increasingly ceding investment decision making to consultants and managed accounts providers who can negotiate fees on the back of their much-larger scale.
"It's hard to crystal gaze but wholesale and retail channel is really going down the managed accounts path and it will put pressure on active manager fees," Sebire says.
The fee pressure is on in institutional land too, but it is not as cutthroat.
JANA senior consultant Robert Moore says the asset consultant has been able to negotiate fees for super funds but the fee cuts are more along the range of one to two basis points.
"Generally speaking, super funds do have a focus on fee reduction and we have seen that increase over the last one or two years and fixed income is no different," Moore says, adding that super funds are mindful of what it costs to run and maintain an active team.
On the brighter side, there is still plenty of business for external active managers - super funds still prefer active over passive for
They also don't have an incentive to build fixed income teams in-house as yields stay low.
"Purely 100% passive is still a relatively small proportion because benchmarks are inefficient," Moore says.
"Creating their own benchmarks is a growing trend for super funds but it is not dominating."
In a shifting landscape, what sets active managers apart is their ability to customise exposures in a way that smart-beta funds
Tim Macready, chief investment officer at Christian Super is an early adopter of passive strategies and now has a third of his Aussie equities exposures allocated to them.
But for fixed income and credit, he has stuck by two active managers, even as the fund has fine-tuned its spending in the asset class over the last three years.
"As a fund, we have to use ESG screens and it can be more difficult finding a solution that is both low-cost and can account for ESG factors," he says.
Echoing Wong's comments, he adds that fixed income funds are not inherently structured to give investors great access.
"Indexed or smart beta products will grow if they can offer creative, low-cost products that give exposure in a meaningful way," Macready says.
"The jury is still out, at least for me, on where that is heading."