Asset Management should be a great business.
If you’re successful, you can grow, scale up your business, while keeping your costs under control, and generate huge profits.
Also the demand for your product looks set to grow persistently as pension and wealth flows increase globally.
However all is not well in investment management – certainly not according to the markets.
Many asset managers have been performing poorly. Share prices of marquee names in the investment management business such as Schroders, Aberdeen and Jupiter are down by over 30% on average over the past year. The UK stock-market is broadly flat over the same period.
This is not to say that all investment houses have suffered the same. Some, like European giant Amundi, have gained through acquisitions and fee increases.
But it’s clear that a broad swathe of the investment management industry is under a cloud – and one that may not lift anytime soon.
So despite the structural positives for the industry, there are also challenges. And these challenges can be more acute for certain sectors in the investment management business.
The costs of doing business are on the up. Regulatory compliance costs, which had been shifting up, have received a further boost with the drive to sustainability standards in funds. And, as the rush into sustainable funds continues, these costs are expected to grow.
For Irish asset managers, the costs of meeting these new regulatory and reporting requirements is the number one challenge, according to a KPMG survey.
Europe continues to lead the way in sustainable funds. In Q1 2024, $11bn flowed into sustainable funds in Europe. The US by contrast had its worst ever quarter, with outflows of $9bn from sustainable funds. The US is becoming increasingly politicised in this area, with many state pension funds making decisions along party lines.
While costs of doing business may be rising, downward pressure on revenue continues. Low cost indexed investing continues to win market share and the advent of “active” Exchange Traded Funds (ETFs) presents a particular challenge for many traditional managers. Management fees can be extremely low. A recently launched US equity ETF commanded a fee of 0.03%!
It is estimated that 90% of net flows into the industry since 2010 globally have been into passive, and active strategies have recently moved into outright net outflow.
Last year, global passive assets surpassed active for the first time ever. The fact that many traditional fund managers are now building up “active ETF” ranges is a clear sign that the competitive threat is real.
For Irish asset managers, according to a KPMG report, this pressure on fees will be the single biggest driver of change over the next 3-5 years. Profit margins are forecast to fall further over that period.
Aside from the issue of costs, part of the problem is that active investment managers as a whole still fail to deliver on expectations. The Financial Times points out that of over 1400 Global equity funds managed in Europe, only 18% beat their low cost passive counterparts over three years after fees. This figure falls to 6% over 10 years!
Brand values in Asset Management fell in 2023 (by about 25% according to Peregrine) for the first time in years, reflecting all the above pressures on profits. Looking ahead there will be no rising tide to lift all boats – progress will be choppy.
There will be winners – and size, market positioning and balance sheet strength will help decide those.
Tradewinds 