In mid-2020, the Financial Times asked the question was investment management the weak link in the current economic/health crisis?
The authors were thinking back to the role played by the banks in the 2008 crisis and the need to inject public money into a system which still hasn’t returned to being a growth driver.
Now, the value of global asset management has grown to such a scale as to far outweigh the assets of the banking system – was it too at risk?
While we still don’t fully know the economic/human costs of the pandemic, at first glance, it would appear that asset management is performing well. In fact, what we have seen, is that many of the pre-pandemic trends have if anything been reinforced and reinvigorated.
The key signposts for the asset management business continue to be costs, consolidation and style.
Lower fees are by now a well-established trend in asset management. Investors today are paying lower expenses on average than ever before.
The drivers behind this trend are well known; increasing customer awareness of cost, growth of cheaper passive instruments, intensified competition among fund managers and in some cases changes in business model such as to fee based rather than commission based.
On average fund costs have declined by 30% since 2013.
Morningstar provide a wealth of data on fund costs and flows. While all funds, on average, have reduced fees, the passive fund industry has led the charge with fee reduction twice that of active funds. Research suggests that low cost funds have a better chance of surviving and outperforming their more expensive peers.
In short this trend to lower management costs seems well-established.
Another fundamental trend in asset management which wasn’t derailed by the pandemic was mergers and acquisition. 2020 was in fact a banner year both in terms of number and value of deals done. Far from the pandemic choking off activity, the value of deals done in 2020 was 30% up on 2019. The reasons remain constant – the drive for scale to deliver synergies, being able to spread compliance and governance costs over a wider base, the need to broaden out a product offering.
While on a global level, activity has been among marquee names like Morgan Stanley, Franklin Templeton, Legg Mason etc., we have also seen a pick-up in acquisition activity in the asset and wealth management business here in Ireland. The drivers have been similar to the global arena such as access to distribution, and increasing AUM to cover the ever increasing regulatory costs. Brexit has also sparked activity in the asset management sector as some UK firms were faced with the decision to invest further and incur more costs if they want to maintain a presence in Dublin.
We are likely to see further acquisitions in this sector, with the only voice that rarely gets heard being that of the customer.
Other established trends in asset management continued through 2020. Flows to passively managed strategies outpaced active by a wide margin. In the battle of style, Growth was substantially superior to Value based approaches, apart from a brief respite in November. And interest in, and flows to, ESG mandates was stronger than ever. ESG investing now has a strong tail-wind of regulatory support, which will see assets under this umbrella continue to expand in coming years.
However at the coal face, there were some standout differences in how investment managers went about their work in 2020. In Europe and the US, fund management companies along with other financial service industries simply went “home”. Now some star fund managers (usually those who had the performance track-record or AUM to demand it) already rarely set foot in the office, but for whole firms to be out of office on this scale was simply revolutionary. Fears over systems, compliance etc. seemed unfounded. As McKinsey point out there have been no major publicly reported breakdowns in technology or back offices at large asset managers, even with as much as a reported 98 percent of employees working from home. This will have impact into the future.
One other change in asset management has been in the area of client contact or business pitch. In the world of “Zoom”, that all important first presentation or one- on-one meeting is clearly less substantial. The ability to build up trust and confidence with a new client is compromised.
In a competitive situation, this plays into the hand of the incumbent, where the people, values, systems etc. are already known.
Large diversified asset managers already in place are at an advantage. In US asset management, 80% of new business has gone to 10 firms in 2020.
So one of challenges for asset management in 2020 has been selling new business to new clients.
The Financial Times can be reassured that asset management is notthe weak link. The industry has been more nimble than perhaps it knew.
But there have been changes in how business is done, especially around the competitive dynamic, which may not be temporary.
Tradewinds 