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Watch for These Moves by Asset Managers

And the three names we believe are best positioned.

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Greggory Warren: In our latest Asset Manager Observer, we continue the work we’ve done the past several years with our North American manager research group, tapping into their data and insights to form more-robust opinions about our own coverage.

As part of this process, we've revisited the four traits we believe are essential for success in the business--differentiation, cost-competitive offerings, repeatable investment processes, and adaptable business models.

On the differentiation front, we expect to see active asset managers pursuing one or more of the following strategies as we move forward.

First, pursuing greater diversification by product, asset class, channel, or geography (which should help offset outflows when a market or strategy is out of favor);

Second, develop or buy specialized expertise in a product, asset class, channel, or geography (which, if run successfully, should lead to less pressure on fees than they would likely see with more-generic strategies);

A third path involves scaling-up their existing business or product offerings (which should offer some relief from fee and margin compression that we envision for the industry over the next five to 10 years); 

A fourth strategy, vertical integration, is actually more of a threat than a strategy for the asset managers as pure-play asset managers are likely to have distributors like Schwab, Fidelity, and JP Morgan continue to launch their own proprietary funds and squeeze them out of distribution platforms.

As for cost-competitive offerings, we realize that the overarching trend over the past five to 10 years has been for capital to flow into the cheapest of the cheapest funds, but we don't believe that active funds will charge the same fees as passively managed funds, at least not in the immediate future.

Instead, we'll likely see a slow decline in fees every year as active managers look to maintain an appropriate position relative to the median price points, ensuring that they stay on retail distribution platforms.

With repeatable investment processes, we continue to believe that active asset managers that have committed themselves to reliable, repeatable investment processes are more likely to produce strong and consistent performance for their fund shareholders.

That said, these processes should be backed up by an experienced, stable investment staff that's well-resourced in terms of personnel and tools, including risk-management analysis.

With regard to adaptable business models, better cultures and investment processes tend to lead to better and more-consistent investment performance, organic growth, and relatively little employee turnover.

That said, when growth is harder to come by, active asset managers will need to have adaptable business models in order to remain competitive in a market that continues to evolve around them.

As we look to the breadth of our coverage, we expect the largest passive managers--which include wide-moat-rated BlackRock and Charles Schwab--and active managers that have scale, established brands, solid long-term performance, and reasonable fees--with wide-moat-rated T. Rowe Price standing out--to be best positioned for the decade ahead.

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.