The Financial Times reported on Halloween the results of a study by Willis Towers Watson done for Pensions and Investments (how’s that for complicated?) showing that the assets under management of the top 500 fund management firms shrank in 2015 for the first time since the Great Recession ended. The decline was greatest for Europe-based managers.
Several factors appear to be at work:
–sovereign wealth funds, especially those sponsored by Middle Eastern oil exporters, have been cashing out to fund expanding budget deficits
–large traditional pension providers are taking assets away from third-party money managers to handle them in-house (this could turn out to be just as disastrous as do-it-yourself dentistry or knee surgery, if the pension administrators try any form of active management)
–flattish markets and a strong dollar, reduced the d0llar value of non-US assets, resulting in slight investment losses.
In addition, within the industry market share is shifting:
–the top 50 firms increased assets; the other 450 lost enough to more than negate those gains
–assets shifted from high-fee active management to low-fee passive alternatives.
–not a good time to be a small or mid-sized asset manager, since operating profits are contracting both from lower assets under management and from lower fees on those assets. This implies to me that greater numbers of minnows will sell out to whales.
–although I can’t see into the inner workings of asset managers any more, my experience is that firms cut their younger, lower-cost (but considerably greater upside) professional employees in order to preserve the income of their higher-paid longer-tenured colleagues. This is, I think, a recipe for disaster …and will worsen the position of smaller firms. More reason to expect consolidation.
–I have little conviction on how this development might affect active management. My inclination is to think that markets will become less efficient, meaning a better change for you and me to outperform. Another possibility, though, is that the door will merely open wider for computer-driven investment strategies. I don’t think this necessarily lessens the chances for you and me. But it may mean that we will have to key off market indicators that we reckon will have appeal to algorithmic investors, rather than those that will motivate humans.