the BCG report
The Boston Consulting Group just released its ninth in a series of analyses of the global asset management industry. This year’s is called Building on Success: Global Asset Management 2011.
BCG’s conclusion: the industry is in long-term decline, despite a bounceback in profitability during 2010 caused by rising markets and an investor shift out of low-fee money market funds into more expensive products.
–the industry is mature everywhere except in emerging markets, so growth isn’t going to come from finding new customers.
–existing products aren’t good enough, with active managers typically offering one-size-fits-all products that don’t beat their benchmarks.
–competition is intensifying. It takes two forms–price competition among industry participants; and the development of competing offerings, like hedge funds or private equity, that siphon assets under management away from the industry.
–there’s a steady flow of money away from high-fee active and equity products and toward lower-fee passive and fixed-income ones.
–in both the US and Europe, a small number of firms have established extremely large relative market shares. This gives them economy of scale advantages that let them lower prices and still maintain their own income. In US equities, for example, 5% of the funds took in 53% of the new money in 2010. The bottom 50% of the market took in only 4%. The European equity business is even more concentrated than that, as is the US fixed income sector. In European fixed income, where concentration is somewhat less, the top 5% took “only” 38% of the new money.
I agree with BCG that we’re seeing a sea change in the asset management business. I’d put the situation slightly differently, though.
Before Black Monday in 1987, investors tended to buy individual stocks rather than packaged products and to rely for advice on savvy registered reps employed by traditional (read: high cost) brokerage houses. The market crash changed all that. The antiquated NYSE system of having monopoly market makers (good for their profits, not ours) froze up; volume disappeared and bid-asked spreads became very wide. Put in a market order and your execution could differ by 5% from the last price you saw on a screen. And it seemed that the 5% was always in an unfavorable direction.
This experience, and the sense that the world was getting to be too complex for non-specialists to decipher, sparked a change in investor preference away from individual stockpicking toward buying professionally-run mutual funds. At the same time, 401ks were becoming more in vogue. Brokerage houses decided to limit their legal liability by turning their reps into marketers of computer-generated financial planning advice and mutual funds. The Baby Boom was just coming into its peak earning years.
I think the Great Recession and the accompanying sharp decline in world stock markets have triggered another sea change. This time it’s a return to do-it-yourself for individuals, based on the assessment (right in most cases, In think, but wrong in some) that brokers are professional marketers, not trained investors, and add little value. In any event, their firms limit what they can say and do.
The Baby Boom is starting to enter retirement. Investment results are more critical than they were before; losses are more painful. So boomers are dialing down their risk profiles by selecting passive products–through ETFs–and fixed income. On top of this, on retirement Boomers are becoming their own Chief Investment Officers as they take charge of managing their 401ks or other defined contribution pension plans.
For institutions, which have long known that their favorite active managers underperform, it’s a switch to “alternative investments,” despite evidence that for the past decade managers of the latter have performed worse than traditional active managers.
For both classes of investors, it seems to me the change has the character of rejecting the devil you do know, figuring the one you don’t can’t be that much worse.
There are obvious issues with this change, assuming I’m correct. Personally, I think pension sponsors are crazy to be building up their allocation to alternative investments. The risks are high, the reported numbers aren’t that great, and there’s lots of anecdotal evidence that some of the reported numbers don’t stand up under more than cursory scrutiny.
For individuals, which is my main focus in writing this blog, the issues are somewhat different. They’re how to get the information you need to make intelligent decisions, and who do you trust. Personally, I think that the investment management industry will follow the same pattern as traditional bricks-and-mortar retailing. It, too, will morph (is morphing) into diffuse internet-connected collections of professional investors working in small groups and selling research or advice at reasonable prices.