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The asset management industry | IE Financial Talks

The Asset Management Industry

By Rafael Hurtado Coll

Today, the asset management industry is undergoing severe changes. Traditionally, the asset management industry has been an excellent business with high and recurring fees for fund managers and other investment vehicles. Currently, the asset management industry has several secular trends, which we will discuss below:

 

  1. Growth of passive management

ETFs and other passive management products have concentrated most of the new flows for more than a decade. Passive management has grown for many different reasons, but, among others, due to low commissions and the inability of active management to beat the indexes.

 

  1. Reduction of commissions

Especially in active management, but also in passive, the management fees of traditional products have only decreased.

In passive management it is logical that the commissions fall, since, in general, passive management is a quasi-commoditized product, and therefore, asset managers compete in price (commissions).

 

  1. Increase of quantitative strategies like Smart Beta

Quantitative strategies such as Smart Beta, which is a hybrid between passive and active management, have experienced significant growth. Many passive managers have seen a way to offer differentiation in Smart Beta. At the same time, active management managers have believed that Smart Beta was a way to compete with passive management.

 

  1. Increase in alternative management

Products such as private debt or venture capital have had extraordinary asset growth. The search for the illiquidity premium has become very common in a world of low yields.

Pension funds, family offices or foundations now have a great weight in high illiquidity products in the strategic asset allocation. The profitability of the alternative products is greater, although their risks may also be higher.

As for the fund managers of investment funds, those dedicated to alternative management have maintained their margins. In fact, 50% of the income in management fees in the world already comes from alternative products. Many traditional managers have plans to manage alternative products.

 

  1. ESG (Environmental, Social and Governance)

The use of extrafinancial criteria in investment management is becoming increasingly important. Today almost all major investment managers take ESG criteria into account in their investment process with several degrees of implementation.

 

  1. Concentration of the industry

Traditionally, the asset management industry has been an extremely atomized sector, without any player having a reallyrelevant market share.

The reduction of fees, especially in passive management, is causing concentrations in the sector and some managers gaining important market share. This is the situation in ETFs, where Blackrock, State Street and Vanguard have a share of almost 80% of ETFs in the North American market (the largest in the world).

As we have said before, the passive management business competes through fees. In any market where price competition is involved, reducing costs is very important. In asset management, the clearest way to reduce costs is through size due to the important economies of scale that exist.

 

  1. Environment of very low interest rates

In the United States and especially in Europe, the environment of low interest rates has led to certain products, especially linked to fixed income, having serious difficulties to offer attractive returns to customers. In many cases, the solution offered by asset managers has been to market products with higher risk (for example, mixed funds).

As we have seen, the asset management industry is a very important one, from the point of view of its own business and because the industry manages trillions of dollars. The allocation of this huge amount of money has a real impact on the economy and the people. The power of managers like Blackrock is very, very big.