Fidelity zero fees fails to translate for European cynics

‘Marketing ploy’ helped US affiliate outsell Vanguard in October

Robo-advice manager spots Brexit bias on UK equities

A cynical, institutional investor base is among the reasons why Fidelity International is unlikely to budge on its refusal to bring zero-fund fees to the UK and Europe despite its sister company Fidelity Investments pipping Vanguard for index mutual fund sales in the US following introduction of the fee structure.

Following its foray into uncharted territory with the launch of two zero-fee funds, Fidelity’s American business has been gaining on Vanguard in terms of sales and shaking up the pecking order of the top-selling passive houses.

US flows data from Morningstar reveals Fidelity Investments raked in $6.9bn in net inflows over October, two-thirds of which came from its passives business. Vanguard’s monthly haul came out to $9.0bn after discounting $4.3bn worth of outflows from its active products.

But excluding sales from ETFs Fidelity actually outsold Vanguard by 40% in the US during the month attracting $6.6bn in flows versus the Pennsylvania passive house’s $4.6bn.

Aside from giving Vanguard a run for their money, Fidelity’s total flows surpassed State Street Global Advisors ETF business SPDR and Blackrock’s iShares, fund groups that have outsold it in previous months.

SPDR had clung to its second top spot since July but was hit hard by $7.4bn of outflows from both its passive and active businesses. In September it brought in $10.4bn by contrast.

Best and worst fund groups for sales in October

Top Selling Fund GroupsActive Passive October Total
Vanguard($4.3bn)$13.3bn$9.0bn
Fidelity Investments$2.4bn$4.5bn$6.9bn
iShares$449m$1.5bn$1.9bn

 

Worst Selling Fund GroupsActivePassive October Total
SPDR State Street Global Advisers($272)($7.1bn)($7.4bn)
Invesco($1.6bn)($2.8bn)($4.3bn)
Franklin Templeton Investments($2.4bn)($235m)($2.7bn)
Source: Morningstar

Zero-fee funds

Fidelity began distancing itself from the rest of the pack after unveiling the first ever zero-fee investment products in August while also slashing charges across its other products and removing minimum investment requirements.

It now offers four funds that have an expense ratio of zero with no minimum investment.

The first full month of flow data for Fidelity’s zero-fee funds shows the Fidelity Zero Total Market Index and Fidelity Zero International Index took in $754m and $234m of inflows. “Strong showings for two funds just out of the gate,” Morningstar senior analyst Kevin McDevitt remarked at the time.

By the end of October, the pair of funds had amassed some $1.8bn in assets between them.

Fidelity sticking by passives strategy

Despite seeing encouraging sales figures in the US, Fidelity’s UK business has already ruled out bringing zero-fee index funds to clients in a Ucits format.

Jose Garcia Zarate, associate director of passive strategies for Morningstar’s European manager research division, notes that in Europe Fidelity are still a predominantly active house and do not have the clout they do in the US when it comes to passive products.

At the end of October, Fidelity’s European index funds had a combined total of €6.5bn in assets under management. Vanguard’s European index funds by contrast had €137bn of AUM.

While Vanguard has made a more aggressive push into Europe recently it is still dwarfed by the likes of Blackrock, which is the dominant player by a long shot with 45% of the market share, as well as businesses including Deutsche Bank’s Xtrackers, Lyxor and Amundi.

Zero fees unsustainable in Europe

Whether adopting a zero-fee approach in Europe could boost Fidelity International’s profile in the passives space, Garcia Zarate isn’t sure. “Maybe before cutting fees down to zero in Europe what they should do is build a business.”

James McManus (pictured), investment manager and head of ETF research at Nutmeg, says there is less incentive for Fidelity’s European business to adopt a similar structure for Ucits products because the passives market in Europe caters to a more institutional crowd.

Also, he says the rules around securities lending makes zero-fee products look less sustainable over the long-term in Europe. McManus says most of the investment products without fees he has seen have tended to rely on stock lending as a source of revenue. But he says this market is cyclical and currently over-supplied.

Loss leader

The market consensus is that Fidelity’s zero fee funds were always intended to be a “loss leader” or a “marketing ploy” for the firm, says McManus.

“I heard the head of another ETF business in Europe say the fact we’re all talking about it tells you how good a marketing strategy it was,” he recalls.

Peter Sleep senior portfolio manager at 7IM agrees the purpose of the zero fee funds is to encourage more retail investors to sign up to Fidelity’s platform and buy higher margin products. “I would imagine their goal will not be to outdo Vanguard or Blackrock, but to make a bigger return in the long term,” he says.

Cynical European investors

There are attitudinal differences between American and European investors when it comes to the concept of zero fees, Garcia Zarate says.

“I think people over here in Europe are a bit more cynical about the zero thing,” he says. “There’s no such thing as a free lunch.”

Zero-fee funds are not a new concept in Europe, says Garcia Zarate. Xtracker, owned by Deutsche Bank’s asset management arm DWS, launched its own range of TER-free products years ago, which was met with a lukewarm reception. He thinks part of the reason it failed to attract support is because investors knew there had to be a catch.

“The catch in that instance was quite a significant swap fee. People were able to see through the very positive marketing message of a zero fee and then realise there were additional costs.”

Lyxor circles zero

Meanwhile European providers have come closer and closer to offering a zero-fee fund.

Earlier this year Lyxor launched a low-cost Core ETF range, boasting the cheapest tracker in Europe at 0.04%.

When it comes to the US market, “Vanguard do not have a right to be the biggest and cheapest,” says Sleep. “They have to continually update their prices to maintain their lead.”

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