Volatility Comes To Fund Town

Volatility Comes To Fund Town

What has been the net effect of the volatile markets on fund manager income statements? Because funds charge their fees daily, yesterday’s market prices only tell 1/20th of the story.

For the past few months, I calculated each fund’s daily assets and advisory fees collected.  In the above chart, the daily volatility is captured in the S&P 500 return of the orange line.  The blue line, and dotted trend, shows the cumulative trend firm-wide fund revenues.  

For most managers, revenues are probably down 20% of more.  In 2016 T. Rowe reported a staff of 6,000, when revenues were at the current level.  Today, the manager has a head-count of over 7,300. If one connects the dots across the industry there may be 20,000 workers at risk.

Most fund charts using this data tell a similar story.  Leveraged funds have steeper drops, as expected.

Compounding March’s reduced collection of management fees, investors are redeeming funds at a rate resembling the rush to unemployment insurance.

The highest reputation firms are struggling to model current trends as seen in this new article.  Most models are broken.

The number reported a few days later was 3.3 million.

COMMENTARY

With job losses hitting the white-collar world, funds will be hit with the double whammy of declining payments into 401(k) accounts and customers needing to liquidate holdings to pay their bills or those of their family.  In the past decades mutual funds have seen little net-redemptions. In the past few weeks alone, around $200 billion has left mutual funds, 4x more than all of 2019 combined. 

In the last decade, Fund groups have calculated their increasingly low-cost fee models on the expectation of continued momentum of new money and low volatility. High volatility and consequent high transaction costs, together with a likely long period of net withdrawals will threaten profitability of such fund products; fees must rise.

Historically, mutual funds have not experienced runs on assets based on crashes in equity markets.  The coronavirus is different in that it has caused an economic crash at the same time and even larger than the crash in security prices.  One usually lags the other.

In normal times, changes in employment happen slowly.  Here are two graphs of a disappearing world.

Here is the increase in unemployment after 2008.  As you can see, the growth is gradual and takes 2 years for most of the effects to be felt.

Similarly, when employment began to grow over the past 8 years it did so in the same near-linear fashion.

Although there is scant data to compare today’s sudden drop in economic activity and assets values, there is plenty of evidence that all recoveries are multi-year affairs.

For that reason alone, I expect asset managers to have already begun the process of layoffs.

Other reasons may include:

  • Unemployment is rising at an unprecedented rate.  Contributions to fund investments will naturally decline.
  • Removing early-withdrawal penalties makes it easy for shareholders to dip into their 401K accounts. 
  • The employee gets more if they are laid off while the government is offering $600/week extra unemployment insurance.
  • There is less negative PR laying off people while everyone is focused on the virus
  • Disruption will lead to consolidation and new product development, best handled with a core team having the capital and flexibility to adapt.

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