Money managers in $137 trillion industry confront end of bull market

NEW YORK – T. Rowe Price Group is reeling from a US$127 billion (S$174 billion) exodus over just two years. At Franklin Resources, the latest member of a billionaire family to run the firm is trying to reverse a nearly uninterrupted 20-quarter losing streak. Across the Atlantic, the chief of Abrdn has reached a blunt conclusion: Merely managing mutual funds is not enough of a business any more.

Across the US$100 trillion asset management industry, money managers have confronted a tectonic shift in investor appetite for cheaper, passive strategies over the past decade. Now they are facing something even more dire: The unprecedented run of bull markets that buoyed their investments and masked life-threatening vulnerabilities may be a thing of the past.

About 90 per cent of additional revenue taken in by money managers since 2006 is simply from rising markets, and not from any ability to attract new client money, according to Boston Consulting Group. Many senior executives and consultants now warn that it will not take much to turn the industry’s slow decline into a cliff-edge moment. One more bear market, and many of these firms will find themselves beyond repair.

More than US$600 billion of client cash has headed for the exits since 2018 from investment funds at T. Rowe, Franklin, Abrdn, Janus Henderson Group and Invesco. This is more than all the money overseen by Abrdn, one of Britain’s largest stand-alone asset managers. Take these five firms as a proxy for the vast middle of the industry, which, after haemorrhaging client cash for the past decade, is trying to justify itself in a world that is no longer buying what it is selling.

The reasons for the companies’ struggles are not a secret. Investors are ditching mutual funds for much cheaper passive strategies, largely managed by giants BlackRock, Vanguard Group and State Street Corp, causing a dramatic, industrywide fee compression that has put a strain on the revenue and margins of smaller players.

Also, with geopolitical tensions and higher interest rates becoming the status quo, even the US$9.1 trillion behemoth BlackRock is feeling some of the pain. In the three months to September, clients pulled a net US$13 billion from its long-term investment funds, the first such outflows since the onset of the Covid-19 pandemic in 2020.

“Structural and secular changes in business models, technology and, most of all, monetary and fiscal policy have made the last two years extremely challenging for traditional asset management,” BlackRock chief executive officer Larry Fink told analysts in October.

Bloomberg News analysed more than five years of money flows, fees, investment performance, revenue and profit margins at the five firms, as well as trends across the industry, to show how the active managers are at greater risk than ever before.

The five publicly traded firms – which oversaw more than US$5 trillion as at June 30 for everyone from workers with 401(k) retirement savings plans to the biggest pension funds in the world, and have all been household names in global asset management for decades – were chosen as a representation for asset management’s middle tier, which is now facing immense pressure, with their struggles shared by most other players in the sector.

The shares of all five firms hint at the state of play. Except for T. Rowe, all of the companies have lost at least a third of their value since the beginning of 2018, compared with an increase of about 60 per cent for the S&P 500.

Despite their hope that clients will return to stock and bond pickers when the going gets tough – and pay for it – the downward trajectory seems irreversible. Passive products have been gaining so much traction, regardless of whether markets go up or down, that by mid-year, they accounted for half of all assets in United States mutual funds and exchange-traded funds, up from 47 per cent in 2022 and 44 per cent in 2021, according to data compiled by Bloomberg from asset managers. A decade ago, it was just 27 per cent.

There is also now a new enemy to contend with: cash, which is where investors want to keep their money while interest rates remain high.

“It’s a slow but surely declining trajectory,” said Dr Markus Habbel, head of Bain & Company’s global wealth and asset management practice. “There is a scenario for many of these players to survive for a few years while their assets and revenues decline until they die. This is the trend in the majority of the industry.” BLOOMBERG