Consolidation, technology and alternative assets all touted as possible ways to reverse declining assets under management
At a recent offsite dinner attended by senior managers of a major European universal bank, the bosses were in apologetic mode, speaking about poor performance of their substantial asset management unit in fatalistic fashion. There was nothing that could be done, they suggested, about the vagaries of the market, the grand arbiter of success or failure in the stark reality of today’s uncompromising funds world.
Similarly at the summer IMPower FundForum event in Monaco, asset managers seemed more apprehensive than in 2022, when a short-lived post-Covid euphoria boosted their spirits. This time round, they were dealing with rising inflation, high interest rates, uncertain growth forecasts and a brutal war in Europe, events which none of their number had anticipated.
The asset management sphere’s ability to identify major tail risks was called into question. And more worryingly, a palpable nervousness had infected the new generation of portfolio and relationship managers attending the summit, many yet to experience interest rates above zero in their professional life. With the demise of sure-fire asset diversification certainties once promoted by Harry Markowitz, the recently-deceased founding father of modern portfolio theory, the industry found itself treading choppy waters.
This shaky state of confidence lends itself to consolidation, believes Nargis Yunis, asset management assurance partner at international audit, tax and advisory firm Mazars.
“I'm seeing a little bit of activity already in terms of some of the larger players increasing [assets] by acquiring businesses relevant to them, maybe in areas they want to expand in,” says Ms Yunis, who previously held a senior role at asset management giant BlackRock.
“It's just easier to buy a business rather than expanding in an organic way.”
She mentions the “fear factor” enveloping the industry, as she coolly eyes the financial heart of the city from the roof terrace of her firm’s London HQ.
Plagued by asset price falls in sectors such as technology stocks, which faced a bad run for three years, investment firms are conscious of clients’ increasing impatience with their managers’ ability to create returns. “From that perspective, with asset prices falling and direct impact on managers’ fees, which are basically a percentage of assets under management, they really need to do something in order to maintain and sustain the levels,” she says.
Some firms and industry commentators believe the answer lies in embracing an increasing menu of investments, particularly alternative assets, typically uncorrelated to market trends. But Ms Yunis believes that, at current raised interest rate levels, appetite for private markets may have peaked.
“I think we've had quite a good run of that, when interest rates were a little bit lower,” she acknowledges. “Maybe one of the main reasons we had that level of activity in private equity markets was because the returns were higher than people were getting in other sectors. And now with credit funds and bond funds, I think that trend might be changing a little bit.”
As a former auditor, she also casts doubt on directors’ ability to value illiquid investments, referring to “varying degrees of due diligence” in some investment firms.
Concerns about the industry’s future are backed by the findings of PwC’s latest annual global wealth and asset management survey. Global assets managed by the industry fell from $127.5tn in 2021 to $115.1tn in 2022. This near 10 per cent fall represents the greatest decline in a decade.
A consequent predicted consolidation drive could see 16 per cent of asset and wealth managers either folding or swallowed up by rivals by 2027. Based on interviews with 250 asset managers and 250 institutional investors, the report draws a vivid portrait of an industry troubled by challenges of consolidation, digital transformation, a shifting set of investor expectations and “retailisation” of previously exclusive institutional strategies.
To cope with the challenges, 73 per cent of asset managers are weighing up “strategic consolidation” with other market players during 2023, to help mitigate risks, build market share and gain access to new segments. Resulting from this trend, PwC expects the world’s largest 10 asset managers to control half of all mutual funds by 2027, up from 42.5 per cent in 2020.
“Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic and geopolitical disruption,” says Olwyn Alexander, global asset and wealth management leader at PwC Ireland. “The choice is simple – adapt to the new context or fail.”
There is however still an achievable formula for success, believes Ms Alexander. But it now contains many more moving parts than the efficient portfolio frontiers that defined progress in previous eras.
Today’s increasingly complex equation includes technology such as generative AI and robo-advisers, diversifying recruitment to embrace a broader variety of ideas, and delivery of “exceptional client experiences.” Firms able to incorporate all of these ingredients in their growth strategy “will be well positioned to not only survive, but thrive”.
