Welcome to 2018!
The S&P 500 Index popped 21.8% in 2017, only to be outdone by the tech-heavy NASDAQ Index, which earned 28.2%. Low employment, soaring consumer confidence, rising home prices, and additional fiscal stimulus brought about by revisions to the U.S. tax code might be a tailwind as we enter the new year.
More broadly, the bull market that began in 2009 has been a rising tide, especially for asset managers. PWC estimates that global assets under management will increase from $78.7 trillion in 2015 to $111.2 trillion by 2020.
There’s much to like about recent performance and future expectations if you are an asset manager. However, there are some thorns on this rose. Here are four trends that will put a great deal of pressure on asset managers in 2018 and beyond:
1. Active to Passive: Investors continue to pull capital from active strategies and redeploy it within passive exchange traded funds. As a result, expect more traditional active managers to get in the game by acquiring ETF companies. Recent examples include Janus purchasing VelocityShares or Columbia Threadneedle buying Emerging Global Advisors. With this strategy, asset managers will attempt to stem the tide of active fund losses by seeking to take money out of their right pocket and put it into their left.
2. Fee Compression: BlackRock made news last March when it announced plans to consolidate many of its actively managed funds with peers that are rules-based and algorithmic. This isn’t just about the 53 stock-pickers that were accordingly asked to step down, but more about CEO Larry Fink’s bet on technology, including its risk management platform, robo-advisors, big data, and AI. In sum, with machines doing more of the work, expect BlackRock to continue to lead a race to the bottom in fees, placing immense pressure on less tech-savvy firms.
3. Scale: It’s often said that if you manage $1 billion, you better manage $3 billion. The mergers of Janus and Henderson or Aberdeen and Standard Life take this idea to another stratosphere and are likely part of what will be continuing consolidations within the industry. With fee compression as a driving force, scale will grow more important for firms trying to compete with the likes of BlackRock, Fidelity, and Vanguard.
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4. Differentiation: Asset managers are beginning to catch up with other industries by connecting with investors via social media, video, and blogging. That’s a positive. But when competing for the same diminished attention spans, the challenge is producing something that is both high quality and differentiated. One firm doing a terrific job is Ark Invest, whose research emphasizes industrial innovation, genomics, next generation internet, and fintech. This type of content strategy is an obvious departure from relying on traditional themes such as macroeconomic forecasts. Producing captivating content in the proper formats or mediums will be pivotal to break away from the pack.
Taken together, these four factors indicate that a rising tide may no longer raise all ships. With new competitive forces in the asset management industry, there are new storms brewing.
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