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In fairness, investors generally have also been enjoying good returns through this pandemic period.
2021 will be another record year for the Asset Management industry.
Markets have performed well, investors have poured record amounts into funds, and costs have been extremely well managed.
Headlines about asset managers’ profits in the Financial Times ring with words like surge, skyrocket and sparkle. These are good times for fund managers.
The bedrock of the strong performance has been how well financial markets have done which translates directly into the value of assets under management. In 2020, markets recovered well from their March lows to be broadly positive for the year and as 2021 comes to a close it is still a positive picture. In Ireland the average multi-asset balanced funds registered a return of just over 11% to the end of November, according to the Aon survey.
And the world of “Working from Home” has helped in cost control in Asset Management. Sifting through the commentary from CFO’s at results season reveals how issues like reduced travel costs continue to feature even in year 2 of the Pandemic. Distribution, client service, company research are all possible without building up the frequent flyer miles. Especially in a world where asset managers will have to display their environmental credentials, a Zoom call, while not perfect, may well hold its own compared to an 8 hour flight to Seattle to see Microsoft’s Investor Relations manager.
So some of this cost reduction may be permanent. Further cost reduction is likely as asset management companies review just how much space they need. Richard Keers, CFO at Schroders, a leading asset management company notes how by reducing space in London and Hong Kong, having reviewed changed working habits, they have saved £16M. Over at abrdn, Chairman Douglas Flint talks of re-designing and re-purposing their office space – which hardly means expanding! So it looks like fund manager surroundings are going to change.
Even if the surroundings don’t change, there’s still a possibility that the name over the front door changes. Mergers and acquisitions remains a firmly entrenched trend in the asset management business. This is happening both at the large institutional end of the spectrum and also among smaller brokerage/wealth management firms.
Asset managers are striking mergers and acquisitions to secure profitable growth, acquire complementary lines of business, and tap into new markets or distribution, in an environment of declining fees, rising costs and the onward march of passive investing. Expect this to continue. The “Thinking Ahead” Institute notes than of the 500 top asset managers 10 years ago, 200 have gone from the list today. There is little sign of this letting up.
Asset Management is still seeing pressure on fee income. The rise of ETFs, Smart Beta and even more nuanced indexed products, ensures that the focus on fund management charges will endure. Value for money and transparency will be key drivers in the dynamics of fund pricing.
So are active managers doing what they’re supposed to do?
No, based on early numbers, not so far in 2021. A new report from AJ Bell shows only 1/3 of active equity funds outperformed their stated benchmark in 2021. And US and Emerging market equities remain the main sources of value destruction – even over a 10 year period, according to the survey. And some charge high fees despite serial underperformance.
Fund costs are moving up the regulatory agenda. The Central Bank here has looked for greater visibility in the issue of performance fees. In the UK, the FCA looks for fund managers to assess the “value” of their funds which includes how they perform, once a year. Surveys show that high net worth individuals favour performance based fee structures.
If the democratisation of investing means that more people are becoming more engaged with their money, more demanding of information, then an industry that has historically been opaque needs to become more transparent.
Tradewinds 