Active managers are struggling in the face of the index-fund craze, fee compression and TDF dominance
MainStay Investments, the mutual fund and exchange traded fund distribution arm of New York Life Insurance Co., has laid off some of its wholesalers calling on retirement plan advisers and consultants, as the defined contribution market grows increasingly challenging for active-management-focused asset managers.
The company laid off three defined contribution investment-only wholesalers, including Jonathan Blaze, national sales director of retirement plans at MainStay. Mr. Blaze, who joined the company in January 2016 from Thornburg Investment Management, was also a regional sales consultant covering the central U.S.
"The defined contribution investment-only landscape has changed dramatically in recent years, and we've realigned our DCIO business to better meet the needs of our clients," said spokeswoman Allison Scott. "We remain committed to the DCIO business."
Active-management-focused shops such as MainStay are struggling to overcome some large hurdles, primarily the onslaught of passive management, dominance of target-date funds and relentless fee compression, observers said.
Within the past five years, more than $800 billion has flowed into passively managed equity mutual funds, while actively managed strategies have experienced nearly $700 billion in outflows.
Defined-contribution plan sponsors have been much more likely to turn to passive funds rather than active funds. In 2016, nearly 12% of sponsors increased the proportion of passive funds on their investment menus, compared with 2.4% for active funds, according to Callan Associates, a consulting firm. Callan expects that trend to continue this year.
Meanwhile, average mutual fund fees in 401(k) plans have declined 38% since 2000, to 0.48% from 0.77%, according to the Investment Company Institute.
"The business isn't as easy or profitable as it was once," Chris Brown, founder and principal of Sway Research, which studies asset management distribution in DC plans, said of DCIO providers.
DCIO distribution generally focuses on plan advisers and consultants, and is separate from distribution within asset managers' proprietary record-keeping divisions.
Mr. Brown said he hasn't seen "a lot" of layoffs, but active-focused shops "are not hiring as much as they used to. They'd been adding steadily for five to six years."
He conducted a recent survey of 22 active-management shops, and said half experienced net redemptions in their respective DC businesses in 2016. That proportion was likely only 20%-25% five years ago, he said.
In addition, eight firms also had negative total asset growth in 2016. When coupled with net redemptions, it creates a dynamic that could lead senior management to "start looking at those resources and start thinking of other opportunities, perhaps," Mr. Brown said.
Not as bright
"I definitely consistently hear [from clients] the opportunity doesn't look as bright as it did two or three years ago," said Neil Bathon, managing partner at FUSE Research Network, an asset-management research and consulting firm.
Firms have also had to contend with a surge in flows to TDFs over other 401(k) funds. TDFs are expected to capture 90% of all new 401(k) contributions by the end of the decade, according to Cerulli Associates, a research firm.
And although the emergence of multi-manager TDFs has allowed asset managers without a TDF to take part as a fund sub-adviser, the bulk of TDF assets are still held in the proprietary funds of giants Vanguard Group, Fidelity Investments and T. Rowe Price.
Some active shops such as Capital Group, parent of the American Funds, and American Century Investments have notably seen recent success with their target-date series.
There are still plenty of other opportunities for active managers, though, observers said.
The most promising ones are "around the edges," in categories such as international and global equity, core fixed income, and small- and mid-cap, as opposed to large-cap, which has been dominated by passive management, Mr. Brown said.
Mr. Bathon sees building demand for more customization and personalization in 401(k) plans as a bright spot, because active managers may be able to find an opening through help on portfolio construction and asset allocation.
"I think it creates more open-architecture opportunities in the long run," Mr. Bathon said.
"New York Life’s MainStay lays off defined-contribution wholesalers amid challenging market" originally appeared on Investment News, a sister publication of Pensions & Investments.