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Survival of the Fittest

The chart below, from the Summer 2019 Morningstar Magazine, is a stark indication of the hurdles asset managers face in the Post-Crash investment environment. 

Source: Morningstar Direct-U.S. Open-End Fund (excluding Money Market and Fund of Funds), ETF, Separate Account, and CIT Historical Data. 

In the early 2000s mutual funds and ETFs enjoyed strong cash inflows. Performance mattered, but even offerings with mediocre Morningstar rankings (2 & 3 stars) attracted net new money. Following the 2008 Crash, success has not been so easily achieved. By 2010, only 4 and 5 star rated products attracted net inflows. After 2013, virtually all positive flows have gone to 5-star offerings only. 

To make matters worse, investment management fees in the Post-Crash period have been consistently declining while net contributions to DC plans, long a staple of steady contributions to mutual funds, have turned negative for the first time since 2000. 

The secular forces that are stressing the asset management business show no signs of letting up any time soon. To survive, managers will have to increase efficiency and cost containment, while providing higher quality and/or lower cost products to the market. In addition, managers must be able to tell their story in a clear and logical manner and demonstrate repeatability of their approach and process.