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Hedge fund investor Doug Kass said on Tuesday that he is shorting several investment managers, including T. Rowe Price Group Inc and Franklin Resources Inc, as they could be “the next group to feel disruption” and may be headed for large share price falls.

Kass, who runs Seabreeze Partners Management, said in a note to clients that he does not believe investors are aware of how commoditized the money management business has become. “As an example, a year ago, a boutique fund manager, Salt Financial, began to pay clients five basis points a year to manage their money!” Kass wrote.

“More and more money is going to passive products and strategies and away from active managers - who have failed to meet the returns of the indices,” Kass said. “Passive products are by definition not as energetic - it is a strategy that trades less actively - compared to active managers.”

More importantly, the fee differential between active and passive managers is wide - with passive providing an attractive low-cost fee alternative to active, Kass said.

Overall, a “toxic cocktail may loom ahead for investment managers,” he said.

Kass predicted lower stock market prices; less volume and activity as low-cost passive strategies continue to replace high cost active strategies; lower transaction pricing (commissions) provided by online services like E-Trade and Fidelity Investments; reduced investment management fees, reflecting the continued share gains of passive products and strategies over the active ones.

Even many of the larger money management firms, including Fidelity and The Vanguard Group are offering some no-fee based exchange-traded funds (ETFs), he said.

“I expect the competitive challenges to active managers like T. Rowe and Franklin to intensify in the coming years,” Kass said.

Kass warned that larger brokerages such as Morgan Stanley and Goldman Sachs Group which are moving their business mix towards the retail investor and have very high cost fee-based wrap products “are particularly vulnerable to the trends discussed.”

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