There's no end in sight to the mutual-fund industry's woes, and money managers have themselves to blame.
Disenchanted with subpar returns, investors redeemed more than $300 billion from U.S. long-term mutual funds last year through Dec. 26, according to the Investment Company Institute. Meanwhile, they plowed more than $300 billion into exchange-traded funds, or ETFs, that typically promise low fees for simply matching the returns of investment benchmarks like the Standard & Poor's 500 Index of large U.S. stocks.
In 2019, the traditional money-management industry isn't even expected to hit its projected average long-term growth rate of an already-paltry 2%-3%, according to analysts at the Swiss bank Credit Suisse.
And it's little wonder why, with just over 37% of actively managed mutual funds beating their investment benchmarks, according to analysts at the brokerage firm Jefferies.
"Investment performance remains a headwind," the Jefferies analysts wrote earlier this month in a report.
The money-management industry is set for heightened investor scrutiny this week and next as Invesco and Janus Henderson post fourth-quarter results along with other fund giants like T. Rowe Price Group Inc. (TROW) and Franklin Resources Inc. (BEN) .
In a preview of how the industry might fare, money manager Federated Investors Inc. (FII) reported last week that pretax income fell by 12% in the fourth quarter, and 16% for the full year. Over the course of 2018, the Pittsburgh-based firm increased its long-term assets under management to by about $25.7 billion to $158 billion, but that was entirely due to an acquisition earlier in the year. Investors redeemed a net $12.3 billion from the long-term funds.
December's steep selloff in U.S. stocks sent many investors rushing to redeem their shares in mutual funds. What's more, the downturn is likely to spill over into first-quarter 2019 earnings, given the lower overall level of assets under management at the start of the year.
"There wasn't anywhere to hide during the quarter, with most major indices recording double-digit declines," according to the Jefferies report.
Invesco, based in Atlanta, is expected to report on Wednesday that pretax profit in the last three months of 2018 fell by 33% from a year earlier to $275 million, the average estimate of analysts surveyed by data provider FactSet. At San Mateo, California-based Franklin, pretax profit fell by an estimated 34% to $430 million.
Invesco said earlier this month that assets under management in its active stock-picking funds fell by 22% during 2018 to $234.7 billion as of Dec. 31. Client assets in "passive" stock funds -- ETFs and low-cost index-tracking funds -- climbed by 17% to $150.5 billion, due to the acquisition of Guggenheim Investments' ETF business last April, which brought in $38.1 billion of additional assets under management.
S&P said last week in a report that asset managers could even face downward pressure on their credit ratings due to the "belief that expected market volatility may have a negative impact on assets under management and revenue in 2019."
On average, 16 big U.S. money managers could see earnings per share this year fall 5% from 2018 levels, Jefferies estimates.
It might be too late for the traditional money managers to chase BlackRock and closely-held Vanguard in ETFs, since those firms already have the size and scale to spread costs over a larger base of investors -- making it tougher for new entrants to compete.
"Scale is increasing as a competitive advantage," the Credit Suisse analysts wrote. The trend is driven by "pricing competition, required technology investment and regulations."
With the money-management industry facing continued downward pressures on fees due to the cutthroat competition, investors in the stocks have little to cheer about. The stock prices of Invesco, Janus Henderson and Affiliated Managers Group Inc. (AMG) have each tumbled more than 40% in the past 12 months.
"We see few near-term catalysts for this group," the Jefferies analysts wrote.