Although just a handful of companies dominate, the U.S. fund industry is not overly concentrated, according to a new report from Broadridge.
The data, analytics and tech solutions firm that serves the financial services industry studied the top five firms for assets in each of several categories — the broad mutual fund market overall, index mutual funds, ETFs, closed-end funds and variable annuities — applying a measure of concentration used by the U.S. Justice Department and Federal Trade Commission.
That measure, the Herfindahl-Hirschman index (HHI), is calculated by squaring the market share of each firm in an industry, then adding them. The HHI index ranges from zero to 10,000. If the HHI is less than 1,500, the industry is not concentrated; between 1,500 and 2,500 the industry is moderately concentrated; and above 2,500 highly concentrated. (A score of 10,000 indicates that one company is the entire market.)
Using HHI, Broadridge found that only two categories within the fund market — index mutual funds and ETFs – are highly concentrated, with HHIs of 5,872 and 2,480, respectively. (The AUM figures for each firm are from Lipper’s June 30, 2018, reports.)
Three firms place in the top five of each category, though not in the same order: BlackRock, Charles Schwab and Vanguard, as the charts below show, and Vanguard far and away dominates the index mutual fund market, with a share of more than 75%.
The broad mutual fund market as well as the closed-end fund and variable annuities markets are far less concentrated than index funds and ETFs, and except for variable annuities, some of the same firms are among the market leaders.
The Broadridge report concludes that despite clear areas of “high concentration in the funds industry … it’s not clear that any actual harm has come to investors” since expense ratios have declined.
Over the past five years, asset-weighted expense ratios have fallen 10 basis points for equity funds and almost seven basis points for bond funds, according to the Broadridge report.
That’s good news for investors but it could be short-lived. Their choices could become more limited as advisors increasingly use model portfolios, moving more assets into fewer funds; as more active funds become closet indexers; and as qualitative ratings and consultants’ recommendations focus on the most visible, and usually largest funds, according to Broadridge.
“We might ponder what market dominance and industry concentration will bring to the funds industry. So far it’s lower prices for investors. Whether the scale that benefits investors’ pocketbooks today works against them tomorrow — as reduced services, fewer choices, less innovation or other adverse consequences — remains to be seen.”
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