Like hedge funds specifically, asset manager fees overall are coming under pressure thanks to the growth of passive, but there is some good news for the sector.
2016 was a terrible year to be in the asset management business. According to research from the Boston Consulting Group, for the first year since the 2008 financial crisis, revenue earned by asset management firms globally fell in 2016 along with profits as investors shifted assets away from high cost, underperforming actively managed funds, towards low-cost passive investments.
According to the consultancy, revenue for the industry fell by 1%, and profits dropped 2% during the year as pressure on asset manager fees increased, that's despite a 7% increase in assets under management to $69 trillion.
The big problem the active management industry is facing is that while investors have more assets they need to put to work, they're increasingly demanding lower cost. So, as assets under management grow, revenue and profits are remaining under pressure. According to the Boston Consulting study, as assets under passive management increased globally by about $1.5 trillion from 2015 to 2016, revenue from passive products remained roughly unchanged at $14 billion.
After the dismal 2016, it seems as if asset managers are finally starting to get to grips with the new normal, and, according to a new report from rating agency Moody's, this is having a positive impact on their bottom (and top) line.
Asset manager fees grow despite investors' love of passive
Moody's half year survey of the largest publicly traded asset managers (BlackRock, Inc., Franklin Resources, Inc., AllianceBernstein L.P., Invesco Ltd., Affiliated Managers Group, Legg Mason, Inc., Janus Henderson Group plc, Waddell & Reed Financial, Inc. , GAMCO Investors, Inc., Cohen & Steers Inc., Federated Investors, Inc. and T. Rowe Price Group, Inc.) revealed EBITDA rose 6.1% sequentially at the end of the second quarter, and 8.9% versus Q2 2016. The surveyed group grew long-term assets under management by 5.4% during the quarter, led by BlackRock and T. Rowe Price. Excluding Janus Henderson, long-term AUM rose 4.0%, driving base asset manager fees 4.6% higher. For the group as a whole, net flows for the second quarter, although excluding Blackrock, net flows remained slightly negative but less so than at any time in the prior four quarters. The organic growth trend for the surveyed group excluding BlackRock has been positive year-to-date.
Excluding Janus Henderson, long-term AUM grew 4.0%, driving base asset manager fees 4.6% higher. For the group as a whole, net flows for the second quarter, although excluding Blackrock, net flows remained slightly negative but less so than at any time in the prior four quarters. The organic growth trend for the surveyed group excluding BlackRock has been positive year-to-date.
Based on these figures, it looks as if the worst could be over for the asset management industry. With fee trends turning positive, it looks as if managers have managed to rekindle customers' interest in existing as well as new products.
However, it should be noted that the industry's fortunes are closely linked to market performance. It remains to be seen if these managers can continue to expand earnings if market volatility returns.