It’s business as usual for fund managers – in fact it’s better than usual.
Recovering markets and consistent positive funds flows have pushed global industry assets under management to a new peak of €93 trillion. That’s up 11% on the previous year. Closer to home European asset managers saw their assets up 5% to over €25 trillion.
Investors both retail and institutional continue to add to their holdings. In Europe investor inflows in 2020 were over €750 billion – that’s the highest since 2014 and one of the highest in the last 13 years.
Two recent reports, well worth reading, from McKinsey and Accenture respectively, paint a generally positive picture.
Most of the fund inflows have been into equities and this accelerated into 2021. Both Active and Passive strategies have made ground. The absolute size of flows into Active has been greater than into Passive. For example in June, active strategies recorded €21 billion of inflows compared to €14 billion for Passive. This still represents a greater momentum of growth for passive products, given the different size of the asset base.
And the asset management business is still very profitable. Despite continued pressure on fee income – down by 1/3 in last 7 years – fund management groups grew their profit margins again in 2020. There is continued focus on costs. Zero travel costs during the pandemic continue to be cited as a positive in many company annual reports. Looking at the costs of running the business compared to the income earned, this has been managed down to 59% from levels of 70% ten years ago.
Corporate activity in the asset management sector continues at pace. Globally, figures from PWC suggest that 2021 is on track to be a record year for M&A.
Ireland is no different. The last 12 months have seen a flurry of deals ushering in further consolidation in the domestic fund management arena. Increasingly the deal rationale is moving beyond just cost synergies. There have been several examples of large asset management companies looking to acquire financial planning and advisory operators to ensure great stability around route to market. This reflects a global trend. Ireland has also seen corporate activity as a fall out from Brexit as some players have opted to exit the market because of uncertainty and others enter, to ensure EU access. There has also been some regulatory driven activity which will see further changes in the Irish asset management landscape.
One fund management trend which continues to break records is that of ESG investing. In Europe overall, flows into ESG funds ballooned to EUR 233 billion in 2020, from EUR 126 billion the year before, according to Morningstar. Responding to investor demand, asset managers launched a record number of 505 new ESG funds and repurposed more than 250 conventional funds in the last year. Regulatory pressure and government policy continue to underpin this drive. This year fund managers need to categorise their funds in terms of ESG credentials further increasing transparency for investors. It is hard to see this reversing.
Increasingly ESG will become a “walk the walk” as much as “talk the talk” for fund managers themselves. Fund management companies will need to demonstrate that they operate to the same high ESG standards that they expect of their investee companies. Gender balance, rotating directors, environmentally rated buildings etc. at the fund management company level will matter for business development. The CEO of Schroders, one of the world’s leading managers, points to and welcomes this level of scrutiny on the fund industry.
And as the dust settles somewhat on this new landscape, expect to see a lot more investment in the brand by fund management companies. Practically all fund managers (97% according to the Accenture survey) see brand as a key competitive differentiator. Given the amount of change of names we have seen in the industry, the majority of companies believe they have decreasing brand awareness today. Allied to this will be a drive by many companies to ensure and promote their brand as fully aligned with best practice ESG principles. Expect to see a lot more investment in brand and brand awareness from the fund management industry.
While underlying profitability and trends were not really impacted by the pandemic, how fund managers worked, was revolutionised. Highly complex organisations moved 100% to a WFH structure smoothly and efficiently. It had been reasonably common already, especially in the UK, to accommodate “star” managers by allowing them to work remotely, whether that meant the Scottish Lowlands, York or Kensington High Street. The pandemic saw this now applied to marketing, client relationship, administration, finance etc.
The future is likely to be about striking a balance the need to coach, mentor and develop softer skills which may require office attendance; and the need to recruit and retain talent where some prospect of WFH would be a positive. Expect a “hybrid” outcome with perhaps a greater degree of structure than some might be currently imagining.
Tradewinds 