While it’s true that passive ETFs and other low cost investment products have flourished, mutual funds haven’t been left out in the cold during the last few years. After falling from $26.1 trillion in global assets in 2007 to $18.9 trillion in 2008, mutual funds have passed their previous high and reached $30 trillion in global AUM, according to a recent Ernst & Young report on wealth and asset management. But that doesn’t mean it’s back to business as usual.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
“Many basic axioms that governed investor behavior and the operation of the industry have long since been discredited. Capital preservation has become the new mantra, particularly for the huge market of baby boomers entering retirement,” says the report.
Asset Managers’ revenue margins fell from 0.7% to 0.5% since the crisis
One of the biggest impacts of this new focus on capital preservation has been pressure on asset managers’ revenue margins, which have fallen from pre-crisis levels of 0.7% to about 0.5% today, according to the Ernst & Young report. This has caused asset management valuations to trail the market since the end of 2009.
Closet beta products will only get harder to sell as more individual investors know to look for them, but investment products that offer better risk adjusted returns will need to become more efficient because the level of competition isn’t going to drop off anytime soon.
“Aggressive cost management — no different from standard management practices in the airline, fast food or hardline retail industry — is the new norm,” says the report.
Compliance allows asset managers to distinguish themselves
But the other similarity to the airline industry in the 80s and 90s is that complex new regulations give asset managers a chance to distinguish themselves. By treating compliance as a core priority, instead of just another back office necessity, and establishing a flexible reporting platform that can adapt to changing regulations (and to regulatory differences between markets) can keep costs under control instead of watching them spike every time a new rule is put into effect.
Ernst & Young even speculates that client data could become a core firm asset, although the report doesn’t specify how it could be monetized without a conflict of interest or exposing confidential data. A wealthy client is more likely to take their business elsewhere if he feels like his data is being sold to the highest bidder than your typical Facebook user.