A rising wave of hot stock markets lifted nearly all listed asset managers by 2021, but the spread between winners and losers is expected to increase next year as investors favor groups exposed to fast-growing areas such as private assets, according to analysts.
“Overall, vibrant stock markets and pandemic-related cost savings have provided a significant crutch to asset managers’ earnings. [since the] short, sharp market correction in March 2020 ”at the start of the pandemic, said Tom Mills, an analyst at Jefferies. “A future and potentially more prolonged withdrawal is likely to be more detrimental to operating margins as many managers are now investing for growth.”
Private markets emerged as the hottest area in transactions this year for mainstream asset managers, who have been trying to capitalize on the popularity of these strategies among investors looking for returns while raising longer-term capital that typically requires higher fees than public market strategies.
This month, London-listed Schroders bought a majority stake in renewable investment firm Greencoat Capital for £ 358m.
The move followed two major alternative transactions in the US: T Rowe Price has the $ 4.2 billion acquisition of credit manager Oak Hill Advisors in October, and the following month Franklin Templeton said he would buy private equity investment specialist Lexington Partners for $ 1.75 billion.
Ju-Hon Kwek, a senior partner at McKinsey in New York, said, “There are likely to be big differences in the performance of individual asset managers next year,” he said. Groups that offer exposure to private markets “are likely to see growth and profitability that is very healthy in light of strong customer demand”.
Traditional asset management groups have tried to protect their profit margins as the conditions that have driven markets to record highs are ready to reverse.
Fiscal stimulus is being withdrawn after nearly two years and central banks are hampering asset purchases, just as fund houses are grappling with the ongoing challenges of fee compression and the rise of passive giants such as BlackRock and Vanguard.
“The old traditional stock-picking business, especially companies that have an unprecedented track record, will probably still be in a painful place,” Kwek said. “Not only is it facing growth and cost pressures in the face of the continuing march of passive managers, but it is very much exposed to the performance of the stock market. These groups are stuck in the middle and this is where you will see a bit of a pinch. ”
He added that another vulnerable group is in a downturn in managers who have opportunistically expanded over the past few years to “hot” areas such as multibat, risk parity or international investment. “There are a handful of companies that have spread their investments thinly across subscale, non-scalable platforms; the result is high fixed costs and operational complexity. ”
Environmental, social and management-oriented strategies continue to grow in popularity among investors. In August, Goldman Sachs Asset Management the Dutch insurer bought NN Group’s investment arm for about € 1.6 billion, attracted by its strong position in this part of the market.
But Mills at Jefferies warned: “The exposure of ESG funds to growth is quite high.”
“If the promise of interest rate hikes next year is met and we see a shift to a more value-oriented market, there could be performance questions around some of these ESG funds.”
Meanwhile, managers have been trying to cut costs by outsourcing. In November, JPMorgan Asset Management outsourced its middle office to the parent bank’s security services division.
“Asset managers will continue to outsource non-core activities because it is a way to reduce costs and increase the capacity to invest in areas of greater differentiation, such as China, ESG and personalization,” said George Gatch, executive director. head of JPMorgan Asset. Management. “Anything related to the management of money or clients that I want to own. Anything else I want to outsource. ”