Asset managers brace for more turbulent markets after pandemic

A rising tide of hot stock markets has lifted nearly all listed asset managers in 2021, but the dispersion between winners and losers is expected to increase next year, with investors favoring groups exposed to fast-growing areas such as private assets, analysts said.

“The generally buoyant stock markets and the cost savings associated with the pandemic have provided an important crutch for asset managers’ earnings. [since the] short and sharp market correction in March 2020 “at the start of the pandemic, said Tom Mills, analyst at Jefferies. “A future and potentially more prolonged decline would likely be more damaging to operating margins as many managers are now investing for growth.”

Private markets have emerged as the hottest area for trading this year for traditional asset managers, who have sought to capitalize on the popularity of these strategies among yield-seeking investors, while also raising capital. longer term which typically incur higher fees than public market strategies.

This month, London-listed Schroders bought a controlling stake in renewable energy investment firm Greencoat Capital for £ 358million.

The move follows two large alternative deals in the United States: T Rowe Price announced the $ 4.2 billion acquisition of credit manager Oak Hill Advisors in October, and the following month Franklin Templeton announced that it would buy private equity specialist Lexington Partners for $ 1.75 billion.

Ju-Hon Kwek, senior partner at McKinsey in New York, said, “There will likely be massive variability in the performance of individual asset managers next year,” said. Groups that offer exposure to private markets “are expected to experience very healthy growth and profitability in the face of strong customer demand.”

Traditional asset management groups have attempted to protect their profit margins as conditions that pushed markets to record highs are about to be reversed.

The fiscal stimulus is withdrawn after nearly two years and central banks are restraining asset purchases, just as fund houses grapple with the ongoing challenges of cost cutting and the rise of passive giants such as BlackRock and Vanguard.

“The old, traditional stock picking business, especially companies with a track record of indiscriminate performance, will likely continue to be in dire straits,” Kwek said. “Not only is he faced with the growth and cost pressure of the continued operation of passive managers, he is also very exposed to the performance of the stock market. These bands are stuck in the middle and that’s where you’re going to see a bit of squeeze. “

He added that another vulnerable group during a downturn are managers who have opportunistically expanded into “hot” areas such as multi-assets, risk parity or international investing in recent years. years. “There are a handful of companies that have tried and spread their investments on non-scalable subscale platforms; the result is high fixed costs and operating complexity.

Environmental, social and governance-oriented strategies continue to gain popularity with investors. In August, Goldman Sachs Asset Management bought the investment arm of Dutch insurer NN Group for around 1.6 billion euros, attracted by its strong position in this part of the market.

But Mills of Jefferies warned, “The exposure of ESG funds to growth names is quite high. “

“If the promise of rising interest rates comes true next year and we see a shift to a more value-driven market, there could be performance issues around some of these ESG funds.”

Meanwhile, managers have tried to cut costs through outsourcing. In November, JPMorgan Asset Management outsourced its middle office to the securities services division of the parent bank.

“Asset managers will continue to outsource non-core activities as it is a way to reduce costs and increase the ability to invest in areas of greater differentiation, such as China, ESG and personalization at scale, ”said George Gatch, Managing Director of JPMorgan Asset. Management. “Anything to do with managing the money or the clients I want to own. Everything I want to outsource.