For US Asset Managers, Vanguard Fee Cuts Matter More Than Tariffs

While the threat of tariffs on Canadian, Mexican, and Chinese imports has roiled the equity markets this week, it has not been the only news to impact the traditional asset managers under our US-based asset manager coverage. Vanguard’s decision to cut fees on around one-quarter of its mutual funds, ETFs, and money market funds (which collectively held $9.2 trillion in assets under management) at the end of 2024 has only added to their woes.

With the traditional names in our coverage more dependent on market returns than organic AUM growth to grow their levels of managed assets, the imposition of tariffs (which will likely impact both market returns and short-term rates) will affect their AUM in the near term. Where one’s managed assets are today has a big impact on where they will be five or 10 years from now, so any market downturn will put some downward pressure on our fair value estimates.

That said, when forecasting future AUM levels for traditional asset managers, we tend to look to the 10-year forward forecasts for a multitude of categories generated by a handful of capital market prognosticators, such that any downturn in the near term will likely be recovered in future periods (assuming, of course, that our 10-year forecast asset-class returns don’t change). This means any near-term market volatility will have only a limited impact on our fair value estimates, and will generally follow the direction of the markets.

Fee Compression a Lingering Challenge for Asset Manager Stocks

The price cuts from Vanguard pose a different problem, as they will likely continue the fee compression trend traditional asset managers have seen over the past decade or so. Although the median fee reduction at Vanguard was only about 1 basis point, the firm is taking anywhere from 1 point to 6 points off the expense ratio of 87 funds, which will pressure some of the managers in our coverage to follow suit.

Fee compression is a lingering issue for the nine traditional asset managers we cover. While the group had not seen management fees decline as dramatically as much as the rest of the industry the past decade, average asset-weighted expense ratios for the industry have started to fall at a slower rate than they had been, while fees continue to come down for our coverage at around the same pace we’ve seen for the past several years.

Having been historically priced below average industry rates for active funds, there had been less pressure on firms in our coverage to lower their fees. But that looks to have shifted some during the past year, as we are seeing higher rates of decline in the realization rates of some managers in our coverage than for the industry overall.

Invesco IVZ, Federated Hermes FHI, and Affiliated Managers Group AMG have all seen their base management fees decline more than the group average and actively managed funds overall in the past several quarters. Franklin Resources BEN will likely join that club, as the firm looks to recapture the business lost at Western Asset Management in the near to medium term.