Month: May 2019

Asset Management Fees are Moving Towards Zero

The individual investor in the United States has never had it easier, at least when it comes to the expenses incurred to get broad exposure to the global stock and bond markets. The common investor now pays fees which are a fraction of the cost paid a few decades ago, and every year fees fall further.  The collapse in fees has transformed the business of asset management in the United States, leading to a decline in active management and persistent concentration of assets in fewer firms. These trends are fast spreading to Europe and developed Asia. Inevitably, they will soon reach markets like India and Brazil, where powerful incumbents are still able to charge their clients 2-4% of assets under management .

The evolution of the industry is well described in The Investment Company Institute’s Factbook (2019 ICI Factbook), a compendium of data on the investment industry in the United States.

 

The Shift from Active to Passive

The primary shift in the asset management industry has been from high-cost actively managed products to low-cost indexed products in the form of both mutual funds and ETFs (exchange traded funds). As shown in the chart below, about 1.5 trillion dollars in actively-managed funds have been replaced by indexed-products.

Persistent Reduction in Fees

The expense incurred by investors in funds have fallen every year, from nearly 1% of assets in 2000 to 0.55% in 2018. The average fee charged by funds has fallen from 1.60% to 1.26%, but assets are increasingly  migrating  to low-cost providers like Vanguard and Charles Schwab. The industry is rapidly consolidating in fewer players. Many active managers are closing funds after milking their client-base for as long as possible. The final destination of this process is likely to be a few very large low-cost providers and a limited amount of highly skilled active managers still able to charge fees above 1% of assets under management.

The data is further broken down in the chart below. The key data point to focus on is the asset-weighted cost of indexed mutual funds which was 0.08% in 2018. These funds are weighted heavily towards  U.S. large capitalization stocks, a category which is seeing fees move to zero (made possible by stock-lending revenues received by the fund manager).

 

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Guide to Quant Investing (Bloomberg)

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Ten bits of advice from Buffett (Seeking Alpha)

Value + Catalyst: the Gazprom case (Demonitized)

Latin America’s missing middle (McKinsey)

China’s  control of the lithium battery chain (FT)

 

Domestic Capital is Fleeing Emerging Markets

Plutocratic elites in emerging markets often “hedge” their bets by funneling financial assets out of their home countries into “safe havens” such as Switzerland and the United States. Maintaining bank accounts and second homes offshore and educating their children in foreign schools provides an insurance policy to protect against eventual political and economic turmoil at home.

In recent years this “keeping-one-foot-out-the-door” mentality seems to have spread dramatically since the great financial crisis. Slowing global growth and high risk-aversion have contributed to the strengthening of the U.S. dollar and the rise of dollar-denominated assets. This period has seen the rise of several very large new contributors, namely China, Turkey and Brazil, to the migration of wealth to safe-havens..

Not one of these countries played a big role in flight capital in the past. Rich Brazilians, for example, historically have had a preference for high-yielding domestic bonds and local real estate, unlike their fleet-footed Argentine neighbors who for decades have taken their assets offshore. But today, these countries are the primary drivers of capital migration. If you add the South Africans, who have been systematically moving both their assets and brain-power out of the country for decades, all of the BRICS (Brazil, Russia, India, China and South Africa), the supposed engines of emerging markets, are seeing persistent capital flight. India is possibly an exception, only because wealth creation is still greater than the funds leaving the country.

The anecdotal evidence on this is overwhelming. Chinese buyers are reported to have spent around $200 billion on foreign real estate in 2018 ($32 billion in Australia alone) and are the major drivers of real estate markets in popular destinations such as Sydney and Vancouver. Russian are known to favor Dubai, Cypress and London; and Brazilians love South Florida, Lisbon and New York. Realtor transaction data point to one-third of total real estate transactions in Lisbon and Vancouver being transacted by Brazilians and Chinese buyers, respectively.

Afrasia Bank’s “Global Wealth Migration Review 2019”( Link ) a compilation of data on the transaction flow of wealthy individuals around the world, provides some color on recent trends in capital flight. The report estimates that in 2018 108,000 High Net Worth Individuals (HNWI) with net assets above $1 million emigrated from their home countries, mainly emerging markets.

The map below, prepared by VisualCapitalist.com, graphically shows the origin and destination of migrant flight capital using Afrasia’s data.

More detailed data on the origin and destination of flows is shown below. A few destinations are highly preferred as safe-havens, with Australia, the U.S., Canada, Switzerland and the U.A.E. receiving most migrant flows. In the case of Australia, the inflows are enough to have a material impact on the total stock of HNWI. Though China and India are seeing significant outflows they also continue to generate many new HNWI. That is not the case in Brazil, Russia and Turkey where the outflows are resulting in a net decrease in the HNWI population. The situation is particularly dire in Russia and Turkey where outflows represent a large part of the home HNWI population and have been persistent in recent years. Other countries cited by the report as important sources of HNWI migrants are Venezuela, Nigeria and Egypt. In the case of Venezuela, HNWI’s have practically abandoned the country, resettling mainly in Spain and South Florida.

Though Afrasia’s data may be a good indication of trends, it probably understates the volume of migrants. This can be seen by looking in more detail at one segment: Brazilians in Florida.

The Case of Brazilians in South Florida

Every country’s HNWI migrants have distinct geographical preferences. As mentioned above, Brazilians have a strong affinity for South Florida. Realtor data for the Florida market indicates that the Afrasia Bank report significantly understates flight capital from Brazil.

A report from the National Association of Realtors on international real estate activity in Florida in 2018  (Link)  cites Brazilians as the most active foreign buyers in Florida in 2018. According to the report, Brazilians accounted for 17% of all real estate transaction in Miami-Dade County, equivalent to 2,400 residences for a disbursement of $1.5 billion.

Moreover, Brazilians are active buyers in other Florida markets, specifically Fort Lauderdale, Palm Beach and Orlando. According to the NAR report, Brazilians bought 2,280 homes outside of Miami-Dade County in 2018. This brings the total of Florida homes purchases by Brazilians last year to 4,680. Total disbursements in the Florida market in 2018 are estimated at $2.87 billion.

The chart below shows the persistent rise of Brazilian buyers in Florida since the great financial crisis. Over this period, Brazilian are estimated to have spent between $18-20 billion in Florida for a total of some 38,000 homes.

The chart below shows the strong presence of Brazilians  buyers in Miami and Orlando.

Interestingly, as the chart below shows, Brazilians are paying significantly more for Florida residence than other foreigners. This is probably an indication that purchases are meant to be primary residences and not vacation homes.

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China Technology

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Brazil Watch

EM Investor Watch

  • Why do investors keep on coming back to Argentina (FT)
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  • Turkey’s key role in the Mediteranean gas market (GMFUS)
  • Malaysia restarts China rail project (SCMP)

Tech Watch

  • Investing in Asian Innovation (Oppenheimer)
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