Bloomberg Businessweek USA - October 30, 2017

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○ As money managers, brokers, and advisers fight for assets, costs keep dropping

The Future Price of

Investing: Zilch

years, nontraditional and intermediate-term

funds are neck-and-neck, with an average return

of 2.14 percent and 2.1 percent, respectively.

Unconstrained funds will have a shot at pulling

ahead if U.S. rates start a steady march upward,

but there’s no guarantee a manager with such a

broad mandate will time the shift correctly. Fidelity

Investments—one of the biggest money managers,

with $2.13 trillion in assets—says this is why it

never opened an unconstrained fund. “One of our

investment beliefs is that predicting interest rates

is extremely challenging and that very few people

have been able to do it consistently,” wrote spokes-

woman Sophie Launay in an email.

Rate forecasting “works if you have a crystal ball,”

says Jeffrey Klingelhofer, one of the managers of the

Thornburg Strategic Income Fund, which invests in

a range of corporate securities but isn’t considered

unconstrained. “But a lot of investors forget that

none of us do, which we’ve been humbly reminded

of time and again.”

Swell acknowledges that the Goldman Sachs

fund’s performance has been “lackluster,” but he

remains committed to its go-anywhere style. Many

bond funds, he says, have benefited from the “free

money” the world’s central banks provided in the

THE BOTTOM LINE Unconstrained funds aim to deliver returns

whether bond markets are rising or falling, but sometimes they

miss out.

Could fees for investing ever fall all the way to zero?

For investors in exchange-traded funds, that prospect

is just three-hundredths of a percentage point away.

On Oct. 16, State Street Global Advisors slashed

the cost of several funds, dropping the annual man-

agement fee of the SPDR Portfolio Total Stock Market

and SPDR Portfolio Large Cap ETFs to 0.03 percent

of assets per year. The funds join similar ETFs from

BlackRock Inc. and Charles Schwab Corp. at that

price. But it may not be the last move: ETF makers

have been cutting costs wherever they can, most

recently by creating their own market benchmarks

to track so that they don’t have to pay licensing fees

to index companies such as MSCI Inc. and S&P Global

Inc. “My guess is that we’ll see the first mainstream

0.00 ETF in the next 18 months,” says Eric Balchunas,

who analyzes ETFs for Bloomberg Intelligence.

aftermath of the financial crisis, lifting everything,

including Treasuries, mortgages, and corporate

bonds. But as the Federal Reserve begins to return

to a more normal policy, that era could be ending.

Although Swell isn’t predicting when rates might

swing in his favor, he says there’s likely to be more

volatility and tougher times for assets that have

done well up until now. “A lot of people have gotten

rich being lazy long in credit,” he says, referring to

investors who have done well by sticking to a bullish

stance on bonds. Swell says the best chance to make

money now is through trades that play off differences

in currencies, interest rates, and yield curves around

the world. “We think the more balls you have in the

air, the better,” he says. “Diversification is key.”

Michael Rosen, chief investment officer at

Angeles Investment Advisors LLC in Santa Monica,

Calif., remains skeptical. As a group, he says, uncon-

strained bond funds have yet to prove they can add

value for investors. “They asked for fewer con-

straints so they could make bets and show how

smart they are,” he says. “It turns out they are not

that smart.” —Charles Stein and Brian Chappatta

“If it’s an

S&P 500

ETF, it doesn’t

matter who

manufactures

it, necessarily”

As money managers compete to bring customers

in the door, razor-thin costs are where the asset

growth is. Of the $738 billion that investors put

into index funds and ETFs in the past 12 months,

$509 billion went to funds costing 0.1 percent or

less, according to data compiled by Bloomberg.

“Investors are really cost-obsessed, so these asset

managers are betting if they lower the fees, they’ll

make a little money because they’ll get all the

assets,” says Balchunas.

For individual investors, the drop in costs can

have a profound effect. If you were to invest $10,000

with annual expenses of 1 percent—not uncommon

for actively managed mutual funds—the total cost

over 30 years would be almost $15,000, assuming

a pre-expense return of 6 percent per year. Drop

the expense ratio to 0.03 percent, and you’d pay

 PERSONAL FINANCE Bloomberg Businessweek October 30, 2017