Fidelity's feverish fee cuts a bid to cure market share woes

How low will it go? Battle against Vanguard becomes a war of basis points

Dec 6, 2013 @ 11:54 am

By Jason Kephart

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(Bloomberg News)

“Vanguarditis,” the asset manager infection that leads to fee cuts and happier advisers, has worked its way into the heart of the Boston Behemoth.

Over the past few weeks, Fidelity Investments has made strategic fee cuts and launched new products to ensure that its products are the cheapest in two categories in which the Vanguard Group Inc. has been eating their lunch for a decade.

This week, Fidelity cut the fees on its Freedom Index target date funds to 16 basis points, or $16 for every $10,000 invested annually, from 19 basis points. It's not a huge cut, but it does make the funds cheaper than Vanguard's target date funds, which charge 18 basis points.

The cuts follow on the heels of Fidelity's first real push into the exchange-traded fund world with the launch of 10 sector ETFs in October.

The newly minted Fidelity sector ETFs come with an expense ratio of 12 basis points, which is slightly cheaper than, you guessed it, the comparable Vanguard ETFs, which charge 14 basis points.

“We offer investors and plan sponsors access to some of the lowest-cost index funds and target date funds in the industry and the changes made to Freedom Index Funds is yet another example of this commitment,” Fidelity spokeswoman Nicole Goodnow said.

Jeff Tjornehoj, a senior research analyst at Lipper Inc., puts it more bluntly.

“They're taking the fight to Vanguard on its turf,” he said.

Fund industry experts contend it's about time.

“They're taking Vanguard seriously, whether it's low fees or not,” said mutual fund industry consultant Geoff Bobroff. “Ten years ago, they were significantly larger than Vanguard, now you can argue they're significantly smaller.”

Vanguard has leapfrogged Fidelity over the past 10 years to become the biggest mutual fund and exchange-traded fund company in the world. It now manages more than $2.2 trillion in fund assets, or 16% of the industry's total, up from $711 billion, or 10% of the total, in 2003, according to Lipper.

Meanwhile, Fidelity's share of fund assets has been stuck in neutral. It manages around $1.7 trillion, or 12% of the industry total, today up from $805 billion, or 12% of the total, in 2003.

Two areas where Vanguard has been gobbling up market share from Fidelity are in target date funds and in sector investing.

In 2008, Fidelity managed 44% of the assets in target date funds, but that's since dropped to 30%, according to Lipper. Vanguard's market share has grown to 26%, from 20%, over the same time period.

“Cost is a huge issue for plan sponsors,” said Harris Nydick, managing member of CFS Investment Advisory Services. “That's why Vanguard does so well; people know they're the cheapest.”

The focus on fees isn't likely to end anytime soon, when it comes to plan sponsors.

“Every quarter, plan sponsors are looking at the weighted average expense ratio and wondering if that's appropriate for the plan size they are,” said Michael Castner, a principal at Retirement Benefits Group.

Advisers are becoming laser-focused on fees in their own right, as more and more transition to a fee-based business models.

Independent registered investment advisers, many of whom are paid in asset-based fees rather than commissions, were the only segment of the financial advice business that grew from 2004 to 2012, according to Cerulli Associates Inc.

“Fidelity needs to establish a presence with advisers that are particularly sensitive to providing low-cost solutions to clients,” Mr. Tjornehoj said.

The rise of low-cost sector ETFs torpedoed Fidelity's market share in sector investing too. Today, Vanguard manages just under 20% of all sector fund assets, the most in the industry. Fidelity, which has a suite of some of the best-performing actively managed sector funds in the fund industry, had more than 20% of sector fund assets in 2003, but that's since been halved, according to Morningstar Inc.

Fidelity may be best known for its history of star stock managers such as Peter Lynch — and now Will Danoff and Joel Tillinghast — but they've always had the tools to compete with Vanguard in the index and low-cost space, it just seems to be something the company hasn't made a priority in the past, according to Katie Reichart, a fund analyst at Morningstar Inc.

“They certainly have the lineup, but it's something that maybe got lost in the messaging,” she said.

One thing Fidelity can take comfort in, is that other fund giants have shown they can better compete with Vanguard by lowering prices.

BlackRock Inc. was the first company to be hit with Vanguarditis, a phrase coined by the wordsmith analysts at AllianceBernstein in 2012 in a report detailing how BlackRock's plain-vanilla ETFs were being outpaced by Vanguard. The loss of market share in that key area for BlackRock led to the launch of its “core” series of ETFs, which have been a hit with advisers so far.

This year, for example, net inflows into the iShares Core S&P 500 ETF (IVV), fees on which were cut in October, have outpaced the Vanguard S&P 500 ETF (VOO) by $1 billion, according to IndexUniverse. Last year, it was Vanguard that took in $1 billion more than the iShares ETF.

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