Anxious Mutual-fund industry Looks to Curtail Withdrawals

About 60 rival mutual fund executives gathered inside OppenheimerFunds' Manhattan office tower in early November to discuss a problem many of them can't shake: persistent client withdrawals.

The Nov. 2 summit, dubbed "The Seismic Shift Senior Leadership Forum," was a day-long brainstorming session about the mass movement of investors away from money managers that try to beat the market. Clients are flocking to index-tracking funds that offer simplicity, lower fees and the assurance of matching the market.

Some attendees argued fees have to come down more aggressively if stock and bond pickers are to compete, according to people at the meeting. Others advocated for a clearer public message about what they see as the benefits of active management, these people said.

The gathering, prompted by changing industry economics, was unusual because it brought together so many different types of executives who compete for clients and assets. Attendees included investing, sales and product development executives from T. Rowe Price Group Inc., Franklin Resources Inc., Affiliated Managers Group Inc. and Janus Capital Group Inc. Details of the forum, which was hosted by trade group Mutual Fund Education Alliance, haven't been reported previously.

Money managers are experimenting with previously unpopular approaches as they grapple with an unprecedented flow of money out the door. Some firms focused on active management are ramping up efforts to retain or lure investors through new fee waivers or cuts, moves they were reluctant to adopt in years past, or trying for new footholds in passively-managed products.

Others are trying to expand overseas or develop funds across new asset classes to bring in higher fees.

Over the past year, investors have pulled $242.7 billion from funds that bet on U.S. individual stocks, while placing $185.9 billion into U.S. mutual funds and ETFs that track stock indexes, according to Morningstar.

Revenue growth for the asset management industry is projected to slow to 2.9% a year between 2015 and 2021, compared with 6% a year between 2011 and 2015, according to a report published earlier this month by Deloitte's Casey Quirk unit, which focuses on asset management.

Fees also are expected to drop further, the consulting firm said. The average passive stock fund currently has an asset-weighted annual fee of 0.11%, while the average annual fee for actively-managed U.S. stock funds is 0.78%, according to Morningstar.

Some actively-managed firms are rolling out more aggressive advertising and using public events to make their case. Family-owned active manager Baron Funds devoted portions of its New York annual shareholder meeting on Nov. 4 to a denunciation of index trackers.

In between performances from Hugh Jackman, comedian Louis CK, singer Kenny Loggins and cast of the Broadway play Hamilton, Baron President Linda Martinson cited the Dutch tulip mania and the dot-com boom as examples of cases in which investors bought and sold at the wrong time. Active managers like Baron, she said, have the ability to sidestep such crashes.

"What you get is mediocrity" with passive investing, she told more than 5,000 shareholders at Lincoln Center. Active management is at the point of "maximum financial opportunity."

Baron didn't attend the Seismic Shift Senior Leadership Forum, but what it has in common with many of those firms is a pattern of client withdrawals in recent years.

The Mutual Fund Education Alliance has convened industry executives in the past but typically in smaller groups. This year it decided to expand the participants because fund executives said industry changes warranted a more sweeping discussion, according to people familiar with the gathering.

The mutual fund group discussed how active managers should respond to media coverage on the growth of passive investing, upcoming regulatory changes from the Labor Department governing retirement advice, and ways to use both active and passive management in investor portfolios, the people said.

What they learned from a private survey is that most of the trade group's members expect the movement away from traditional money managers to persist, the people said.

A consultant from Casey Quirk told them the survey of group members found that two-thirds expect the growth of passive investing to continue at its current rate over the next five years. Of the respondents, 19% said they expect the growth of index-tracking funds to accelerate further.

Write to Sarah Krouse at sarah.krouse@wsj.com

(END) Dow Jones Newswires

December 13, 2016 08:25 ET (13:25 GMT)

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