Challenges in the Asset Management Landscape
The asset management industry, responsible for overseeing approximately $100 trillion, is experiencing a seismic shift in investor preferences. Over the past decade, investors have increasingly favored cost-effective, passive investment strategies, causing profound changes. Beyond this, the asset management sector faces an even graver concern the potential end of the extended bull market that has concealed inherent vulnerabilities.
According to Boston Consulting Group, around 90% of the incremental revenue generated by money managers since 2006 has been attributable to market upswings, rather than the ability to attract new client capital. As a result, industry experts and consultants now caution that the sector teeters on the precipice of a critical moment. A single bear market could push many of these firms beyond the point of recovery.
Ben Phillips, the Head of Asset Management Global Advisory Business at Broadridge Financial Solutions Inc., describes this situation as a pivotal moment, stating, “It’s a final act in that many firms that have coasted for decades will no longer be able to coast. These firms have to change, and they have to pull it off.”
Client Outflows and Industry Struggles
Recent years have witnessed over $600 billion exiting investment funds managed by prominent firms such as T. Rowe Price, Franklin Resources Inc., Abrdn Plc, Janus Henderson Group Plc, and Invesco Ltd. The total outflows from these firms since 2018 surpass Abrdn’s total assets under management, highlighting the challenges the industry faces. These five firms represent the broader middle section of the sector, which has been grappling with a decade of declining client inflows and attempting to establish relevance in an evolving marketplace.
The primary reasons for their predicament are no secret: Investors are increasingly switching from mutual funds to cost-efficient passive strategies offered by industry giants like BlackRock Inc., Vanguard Group Inc., and State Street Corp. This transformation has led to extensive industrywide fee compression, impacting the revenue and margins of smaller players.
Even BlackRock, the colossal entity overseeing $9.1 trillion, is not impervious to the industry’s challenges. The three months leading up to September saw a net outflow of $13 billion from its long-term investment funds, marking the first such outflow since the onset of the pandemic in 2020. Larry Fink, BlackRock’s CEO, pointed out, “Structural and secular changes in business models, technology and, most of all, monetary and fiscal policy have made the last two years extremely challenging for traditional asset management.”
Analyzing the Industry’s Vulnerabilities
A comprehensive analysis by Bloomberg News spanning over five years, assessing money flows, fees, investment performance, revenue, and profit margins of the five aforementioned firms, illuminates the heightened risks faced by active managers. These publicly traded companies collectively managed over $5 trillion as of June 30, serving clients from 401(k) plans to major pension funds. Their experiences are reflective of the broader middle-tier asset management landscape, which now grapples with mounting pressures.
The performance of their shares paints a telling picture. All five companies, with the exception of T. Rowe Price, have witnessed a decrease of at least one-third in their stock value since early 2018. This is in stark contrast to the S&P 500, which observed an approximate 60% increase during the same period.
Rise of Passive Investment Strategies
The rise of passive investment products, irrespective of market conditions, poses another challenge to active managers. By mid-year, passive strategies represented half of all assets in U.S. mutual funds and ETFs, up from 47% in 2022 and 44% in 2021. A decade ago, this figure was only 27%. The proliferation of passive products has altered the dynamics of the industry, regardless of whether markets are on an upward or downward trajectory.
To complicate matters further, cash has emerged as a formidable rival. In the current climate of high-interest rates, investors favor keeping their assets in cash.
Challenges for the New Generation of CEOs
The new wave of CEOs in the active management sector, including leaders like Rob Sharps at T. Rowe, Andrew Schlossberg at Invesco, Ali Dibadj at Janus, Stephen Bird at Abrdn, and Jenny Johnson at Franklin, find themselves grappling with the imperative to revitalize their firms. These CEOs, a mix of industry veterans and external hires tasked with innovation, must address declining legacy businesses and the urgent need to diversify beyond traditional, actively managed mutual funds.
As Stefan Hoops, CEO of DWS, the $900 billion asset management arm of Deutsche Bank AG, points out, “Over the last 10 years, more than 100% of revenue increase was market-performance driven—just markets going up. Now imagine you have markets going sideways, but the same quantum of margin compression, then all of a sudden you’re potentially faced with a decade of shrinking revenues.”
The challenges faced by these firms are not isolated. For instance, Franklin experienced only two quarters of net long-term inflows since 2018. Janus Henderson, after 21 consecutive quarters of outflows, had its first quarter of inflows earlier this year, only to revert to net outflows. Since its merger in 2017, Abrdn has not seen a year of net inflows.
Exploring New Strategies
For many firms, including Abrdn, private markets, and specifically private credit, have emerged as potential saviors. Asset managers of all sizes, from smaller entities to industry giants, have embraced the private credit asset class, often for the first time. This shift has triggered a surge in mergers and acquisitions within this space, allowing firms to offer sought-after strategies with higher fees to clients.
While this shift may temporarily boost revenues, it may not provide the salvation these firms are seeking in the long term.
As the challenges persist, the path ahead for the asset management industry remains uncertain. Firms are engaged in a race against time to reinvent themselves and adapt to an evolving landscape, where passive strategies and high-interest rates have fundamentally altered the rules of engagement.